Pedaling as Fast as We Can

Friday Reflection | February 5, 2021

The odd alchemy of the pandemic has created a quality of optimism for certain companies and sectors that has supported stock prices despite broader economic struggles. This week, that optimism in turn pushed the overall market up this week by +4.6%, with multiple indices reaching record highs.

We believe this optimism is based on two things. First, innovation and change have dominated the news cycle over the last year, which we’ve written about numerous times. Second, we’ve had help from ultra-low interest rates, and the government is promising more support for public health efforts and financial markets. The Biden administration is moving forward quickly on the latter, with the House approving the budget plan today that will push that forward.

As for innovation, remote and video-based activity is the overarching theme that’s driven investors to push up stock prices for the companies delivering content streaming, online shopping, video-based learning, remote office work, and streaming of exercise classes. In contrast to the chaos of the recent short squeezes epitomized by GameStop, there are other areas of our day to day activities where optimism may also have run ahead of reality.

As a result of the pandemic, people have experienced dramatic changes at work, with social engagement – and with exercise. In 2020, bicycle sales in the US increased +120%, creating stress on the global supply chain, and leading to delays and shortages. Challenges for faster production include raw material acquisition, manufacturing, labor shortages, and transportation delays – and in the case of bicycle components, business concentration. Supply chains such as this are often international, and with the pandemic, more fragile than ever.

Shimano, a market-leading Japanese bicycle parts manufacturer founded in 1921, has a 70% global market share for bicycle brakes, gears, and bicycle components. Shimano is a financially strong, well-managed company, and their sales are up in response to consumer demand for bicycles. Like many companies that have struggled to handle Covid-related operating limitations and expenses, their earnings haven’t increased much. Without an increase in profits, there may be no justification for the 50% increase that Shimano’s stock price experienced in 2020. 

Perhaps Shimano’s stock price has risen too far, too fast. What about a company more fully at the center of remote exercise innovation, Peloton? They produce high-end exercise equipment along with workout content via live streaming and recorded classes. Founded in 2012, the company went public in September 2019 at $29/share. They reported their third consecutive quarter of profits yesterday, beating estimates for the third quarter in a row. Peloton is innovative and on the leading edge of behavior shifts due to the pandemic. Unfortunately, we think the benefits of their innovation won’t help investors, given that their stock now trades at $148/share, a full 434% over where it began the year. Shimano now trades at about 48 times earnings; Peloton is trading at a whopping 330 times earnings.

Although 2021 has not brought an end to the pandemic, it has energized many with a sense of resolution. Vaccine deliveries are underway, and efforts at national and local levels are increasing vaccination rates. Ideas of travel are bubbling up, and the mood is lightening up with the anticipation that infection is less likely. Efforts to restore economic activity are underway as well.

This momentum readies us all for renewed engagement on issues of personal concern – getting enough exercise, caring for elderly parents, completing a career shift, launching young adults in a moment when the economy is limping. It also gives us hope and a foundation from which we can choose to engage on larger issues like racial equity, dialogue across the political spectrum, and environmental protection.

And the market will continue to do its volatile dance while we make progress on our goals, while Shimano and Peloton build their resources to catch up with their high stock prices, and while we work together to move past this pandemic.