Short Selling

Peloton’s Share Price Crash: The Short Sellers Were Expecting It

featured image
Peloton Interactive
PTON:US
12 months:
-55.65%
Activity:
Bearish
Pattern:
Growing Short Interest
News:
Disappointing Q1 FY2022 Results
Peloton Interactive
PTON:US
12 months:
-55.65%
Activity:
Bearish
Pattern:
Growing Short Interest
News:
Disappointing Q1 FY2022 Results

Last Friday, Peloton Interactive’s (PTON: US) share price fell around 35% on the back of the company’s Q1 FY2022 earnings. The results were poor – not only did Petolon post a huge loss for the quarter (net loss of $376 million vs net income of $69 million in Q1 FY2021), but it also slashed its full-year sales guidance by around $1 billion.

Could investors have seen this share price fall coming? Absolutely. Looking at the short-selling data on Peloton Interactive, there were clues that there was a risk to the downside here.

Peloton Interactive: Short Selling Data

An analysis of the short-selling data on Peloton reveals that over the last six months, short interest has been rising steadily.

If we go back to June 1, 2021, around 6.3 million Peloton shares were on loan, representing approximately 2.3% of the free float. However, by November 1, five months later, 13.5 million shares were on loan, representing 5.0% of the free float.

Multiple graphs show the growth of shorted shares over the course of one year

While the short interest of 5.0% may not seem that concerning (there are plenty of high-growth stocks with short interest of 10%+), it’s the trend that’s important here. In the space of five months, short interest rose 117%.

Meanwhile, the number of daily short side transactions, and the utilization rate, also rose significantly over that period. Back on June 1, there were around 250 transactions on the short side and utilization was 3.6% However, on November 1, there were around 440 transactions and utilization was 8.3%.

Overall, the data clearly shows that institutions were ramping up their short-selling bets on Peloton over the last few months. This kind of short-selling activity is generally a red flag. Often, when stocks see a sharp rise in short interest, they underperform in the near term.

What Are Short Sellers Doing Now?

So, what are the short-sellers doing now? Have they backed off after the share price fall or are they increasing their short-side bets?

Looking at the latest short-selling data on Peloton, we can see that as of November 5, 15.3 million shares were on loan. That represents a short interest of about 5.7%. So, short-sellers seem to have increased their short bets since the company’s poor Q1 results.

A table from 2iQ Terminal detailing Peloton's Cost to Borrow, Last Price, Loan Volume and Last Update

It’s worth noting here that short-selling data from FINRA shows that there was a huge spike in short-selling activity on November 5. The number of shares shorted that day was 17.5 million. By contrast, the average number of shares shorted in the previous five trading days was 1.3 million.

A table details the figures for Peloton's shorted shares over a 1 year periodSource: FINRA

Given that short interest is still rising, we think caution is warranted towards Peloton Interactive right now. The data suggests that institutions see a further downside here.

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