Jim Cramer breaks down Peloton's IPO, reveals the right time to buy the stock

Key Points
  • "This is not the kind of market where you want to rush into a newly minted growth stock, like Peloton," CNBC's Jim Cramer says.
  • "If you think this stock is enticing, just be patient ... we're in a treacherous market for fast-growing companies with big losses," the "Mad Money" host argues.
  • He recommends waiting for the stock to come down between $17 to $23 before pulling the trigger.
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Peloton's IPO & right time to buy the stock: Jim Cramer breaks it down

CNBC's Jim Cramer on Thursday suggested investors refrain from buying shares of newly public Peloton until the price is down at least $4 from its first trade.

After the IPO priced at $29, raising $1.16 billion, the exercise equipment maker opened on the Nasdaq Composite at $27 and rose briefly before trending downward. The "Mad Money" host thinks it's worth starting a position between $17 and $23 per share.

His concern is that Peloton has strong growth but lacks earnings in a market where money managers now want to see a profit.

"This is not the kind of market where you want to rush into a newly minted growth stock, like Peloton. If you think this stock is enticing, just be patient ... we're in a treacherous market for fast-growing companies with big losses," Cramer said. "Until that mindset changes, Peloton will trade like a money-losing exercycle company with no soul."

Peloton's revenue grew 110% to $915 million in fiscal 2019 ending June, up from 99% growth in fiscal 2018. However, revenue costs for both its hardware and service businesses were up 110% and 127%, respectively, he pointed out.

The company, which offers cycles and treadmills with screens for viewing fitness classes that users subscribe to, has real competition in both the exercise and subscription industries, Cramer argued. Some of the recognizable players in the workout world include Planet Fitness, Equinox and Soul Cycle. On the subscription front, Peloton is up against a number of app-based services that come without the big cost of buying a big machine.

Outside of the business model, Cramer is critical of Peloton's dual-class share structure that gives public shareholders little voting rights. Another thing to worry about is lawsuits from music publishers who say that Peloton is using music from artists without licensing the content, he added.

"Still, even with these negatives, again, I'd be happy to recommend this stock at the right valuation. There aren't many companies with 100% plus revenue growth that's accelerating," the host said. "But even after pulling back today, Peloton has a $7 billion market cap, which means it's selling for roughly five times 2020 sales estimates — too rich for an entertaining in-home health machine."

Shares of Peloton closed at $25.76, down more than 11% in its first day of trading. Sales are projected to reach nearly $1.6 billion in the next fiscal year — about 74% more than fiscal 2019 — but the company is not projected to turn a profit in the near future, according to FactSet.

"I think Peloton may have missed its chance. It's just not the kind of stock this market wants. It's been left behind by the Wall Street fashion show, people," Cramer said. "Unless the investment bankers start pricing these IPOs a lot lower, institutional investors will continue to greet them with the skepticism that Peloton got today. It will become the norm, not the exception."

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Jim Cramer breaks down Peloton's IPO, reveals the right time to buy the stock

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