PTON - Peloton

[Broeb22]

If I were a bear, I'd look at this churn chart (attached) from their investor day and think Gee, did the pandemic save PTON's churn metrics? It certainly seems like churn was elevated for about 4 quarters prior to COVID-19 happening.

 

If I take their last 4 years of results, they have sold $2.7 billion of products, i.e. treadmills, bikes, etc. Divided by $2,000, they have sold a product to approx. 1.4 million households, or 1.1% of total households, and 1.8% of households >$50k income. This fiscal year if their product revenue doubles to $3 billion, that's another 1.5 million households, and another 1% of the population (2% of target market). You can make your own extrapolations as to where this goes in a fitness market that is and likely will always be competitive.

 

What is more important is PTON is currently at about a $550 million connect subscription revenue run-rate, which let's say doubles to $1 billion next year.

 

How much of the value of this business is tied to the ongoing sales of products vs. the subscription business? Will the subscription business be able to support the cost structure of the total company at some point when product growth declines? Will SG&A costs ramp down when product growth does and will PTON be able to afford spending on sales and marketing at the same levels in the future when the product business growth decelerates (or even declines)?

[chrispy]

Broeb - interesting questions. It should be noted that when the bikes are financed at 0%, the digital subscription at the top tier price is mandatory until the product is paid off. Therefore, churn will be 0 (I think) for every financed bike for a couple of years

[Broeb22]

Broeb - interesting questions. It should be noted that when the bikes are financed at 0%, the digital subscription at the top tier price is mandatory until the product is paid off. Therefore, churn will be 0 (I think) for every financed bike for a couple of years

 

That's interesting. If that is the case, then the true churn (i.e. people who have a choice to subscribe or not) would be a lot higher than these headline metrics would suggest, no? Is there a way to know how many of their current subscribers also are currently "locked in" to their subscription?

[A Dhandho Investor]

Broeb - interesting questions. It should be noted that when the bikes are financed at 0%, the digital subscription at the top tier price is mandatory until the product is paid off. Therefore, churn will be 0 (I think) for every financed bike for a couple of years

 

That's interesting. If that is the case, then the true churn (i.e. people who have a choice to subscribe or not) would be a lot higher than these headline metrics would suggest, no? Is there a way to know how many of their current subscribers also are currently "locked in" to their subscription?

 

Guys, why are you nitpicking over details? Dalal has shown that it you can have multibaggers in your portfolio without doing a lot of in depth fundamental analysis. In the current market good old level 1 thinking works best, so why waste time trying to get the details right? 

[Broeb22]

 

Guys, why are you nitpicking over details? Dalal has shown that it you can have multibaggers in your portfolio without doing a lot of in depth fundamental analysis. In the current market good old level 1 thinking works best, so why waste time trying to get the details right?

 

You just wait. This $32 billion EV company is going to be huge. They only need $5 billion of software revenues to trade at a 20x P/ Software Sales at an $100B EV. Or about 5x the size of where they might be next year. But because PTON ALWAYS doubles revenues, they will get there in less than 3 years. So basically this is a classic Pabrai double (or triple) in 3 years.

 

Think about the arbitrage they can do when they can buy bikes back at $500 then sell them refurbished at $1200. There will be a huge, profitable marketplace for Peloton used equipment, so PTON doesn't get just one bite at the apple when they sell a bike. They sell, buy it back, re-sell it, buy it back, and re-sell it again. So that's like 3 bites at the apple for the same piece of equipment. Boom. Bear case dismantled.

[D33pV4lue]

If I were a bear, I'd look at this churn chart (attached) from their investor day and think Gee, did the pandemic save PTON's churn metrics? It certainly seems like churn was elevated for about 4 quarters prior to COVID-19 happening.

 

If I take their last 4 years of results, they have sold $2.7 billion of products, i.e. treadmills, bikes, etc. Divided by $2,000, they have sold a product to approx. 1.4 million households, or 1.1% of total households, and 1.8% of households >$50k income. This fiscal year if their product revenue doubles to $3 billion, that's another 1.5 million households, and another 1% of the population (2% of target market). You can make your own extrapolations as to where this goes in a fitness market that is and likely will always be competitive.

 

What is more important is PTON is currently at about a $550 million connect subscription revenue run-rate, which let's say doubles to $1 billion next year.

 

How much of the value of this business is tied to the ongoing sales of products vs. the subscription business? Will the subscription business be able to support the cost structure of the total company at some point when product growth declines? Will SG&A costs ramp down when product growth does and will PTON be able to afford spending on sales and marketing at the same levels in the future when the product business growth decelerates (or even declines)?

 

Let me start this off by saying I have absolutely no freaking idea what the TAM for PTON is. That being said this is what I came up with.

 

Using the US as a proxy there are ~128 million households, I was able to find a 2017 stat of total gym members ships of 61 million representing 47% of households. If 30% of US households make over $100,000 and 47% of those have gym memberships that would put the US TAM at 18 million and their current market share at 5%. That does not include penetration into Canada, UK, and Europe.

 

I have no skin in the game here but just looking at the potential US TAM I think its safe to say that the runway is pretty large. What's sub 1% quarterly turn on 1 million subscriptions when you could potentially add millions of subscribers?  If you are a bear you will also want to think about how the Pandemic will change people's behavior. I'm not smart enough to figure that out.

 

I think its best to not stand in front of a freight train.

[Gregmal]

I agree for sure there is a huge TAM and many options to expand the brand. I have a few puts(instead of outright short) for this reason. Shorting something with that type of dynamic is much more dangerous than some one dimensional, commoditized crap like BYND or ZM.

 

Where I think there is an unseen opportunity is using the frailty of the current physical gym market to potentially expand the brand via licensing/franchise partnerships and/or increasing the network effect. I can see quite a few gyms, especially smaller scale ones utilizing a "Peloton Partner" model to drive traffic and enthusiasm. In fact, you've already seen it with many of the Ironman, Crossfit, F45 type stuff popping up.

 

My interest as a short play is really just a bubble burst/covid reverse hedge. If the music stops this is getting crushed. But there are definitely long term avenues which can be pursued beyond simply selling Nordic Tracks with iPads on them.

 

[influx]

I agree for sure there is a huge TAM and many options to expand the brand. I have a few puts(instead of outright short) for this reason. Shorting something with that type of dynamic is much more dangerous than some one dimensional, commoditized crap like BYND or ZM.

 

What's the duration of the puts?

[Castanza]

If I were a bear, I'd look at this churn chart (attached) from their investor day and think Gee, did the pandemic save PTON's churn metrics? It certainly seems like churn was elevated for about 4 quarters prior to COVID-19 happening.

 

If I take their last 4 years of results, they have sold $2.7 billion of products, i.e. treadmills, bikes, etc. Divided by $2,000, they have sold a product to approx. 1.4 million households, or 1.1% of total households, and 1.8% of households >$50k income. This fiscal year if their product revenue doubles to $3 billion, that's another 1.5 million households, and another 1% of the population (2% of target market). You can make your own extrapolations as to where this goes in a fitness market that is and likely will always be competitive.

 

What is more important is PTON is currently at about a $550 million connect subscription revenue run-rate, which let's say doubles to $1 billion next year.

 

How much of the value of this business is tied to the ongoing sales of products vs. the subscription business? Will the subscription business be able to support the cost structure of the total company at some point when product growth declines? Will SG&A costs ramp down when product growth does and will PTON be able to afford spending on sales and marketing at the same levels in the future when the product business growth decelerates (or even declines)?

 

Let me start this off by saying I have absolutely no freaking idea what the TAM for PTON is. That being said this is what I came up with.

 

Using the US as a proxy there are ~128 million households, I was able to find a 2017 stat of total gym members ships of 61 million representing 47% of households. If 30% of US households make over $100,000 and 47% of those have gym memberships that would put the US TAM at 18 million and their current market share at 5%. That does not include penetration into Canada, UK, and Europe.

 

I have no skin in the game here but just looking at the potential US TAM I think its safe to say that the runway is pretty large. What's sub 1% quarterly turn on 1 million subscriptions when you could potentially add millions of subscribers?  If you are a bear you will also want to think about how the Pandemic will change people's behavior. I'm not smart enough to figure that out.

 

I think its best to not stand in front of a freight train.

 

The issue with this is it ascribes no value to how difficult it is to capture market share. It's like the people who go on Shark Tank and say "This industry is 200bazillion dollars. All we need to do is capture .5% and we are bazillionairs!"

 

I'm not saying you're wrong. Just that investing from this frame of view is risky as it's pure speculation.

 

 

[Gregmal]

I agree for sure there is a huge TAM and many options to expand the brand. I have a few puts(instead of outright short) for this reason. Shorting something with that type of dynamic is much more dangerous than some one dimensional, commoditized crap like BYND or ZM.

 

What's the duration of the puts?

 

March and a few in July. Ive still got some intention of building into more of the Julys. My general thesis is that the market is largely complacent right now for a variety of reasons and between a good number of events taking place over the next couple months and perhaps the covid boost here beginning to wane that a correction/maybe full blown bubble pop type of event is feasible with valuations on some of these things where they are. If something like this survives the next 6 months of "return to normal" then I wouldn't really want to be shorting it.

[D33pV4lue]

If I were a bear, I'd look at this churn chart (attached) from their investor day and think Gee, did the pandemic save PTON's churn metrics? It certainly seems like churn was elevated for about 4 quarters prior to COVID-19 happening.

 

If I take their last 4 years of results, they have sold $2.7 billion of products, i.e. treadmills, bikes, etc. Divided by $2,000, they have sold a product to approx. 1.4 million households, or 1.1% of total households, and 1.8% of households >$50k income. This fiscal year if their product revenue doubles to $3 billion, that's another 1.5 million households, and another 1% of the population (2% of target market). You can make your own extrapolations as to where this goes in a fitness market that is and likely will always be competitive.

 

What is more important is PTON is currently at about a $550 million connect subscription revenue run-rate, which let's say doubles to $1 billion next year.

 

How much of the value of this business is tied to the ongoing sales of products vs. the subscription business? Will the subscription business be able to support the cost structure of the total company at some point when product growth declines? Will SG&A costs ramp down when product growth does and will PTON be able to afford spending on sales and marketing at the same levels in the future when the product business growth decelerates (or even declines)?

 

Let me start this off by saying I have absolutely no freaking idea what the TAM for PTON is. That being said this is what I came up with.

 

Using the US as a proxy there are ~128 million households, I was able to find a 2017 stat of total gym members ships of 61 million representing 47% of households. If 30% of US households make over $100,000 and 47% of those have gym memberships that would put the US TAM at 18 million and their current market share at 5%. That does not include penetration into Canada, UK, and Europe.

 

I have no skin in the game here but just looking at the potential US TAM I think its safe to say that the runway is pretty large. What's sub 1% quarterly turn on 1 million subscriptions when you could potentially add millions of subscribers?  If you are a bear you will also want to think about how the Pandemic will change people's behavior. I'm not smart enough to figure that out.

 

I think its best to not stand in front of a freight train.

 

The issue with this is it ascribes no value to how difficult it is to capture market share. It's like the people who go on Shark Tank and say "This industry is 200bazillion dollars. All we need to do is capture .5% and we are bazillionairs!"

 

I'm not saying you're wrong. Just that investing from this frame of view is risky as it's pure speculation.

 

Please tell me more about my frame of view.... Like I said I don't own this and I am not short it. I am value investor PTON would never be in my portfolio for the reasons you point out, I am not a "spread sheeter". I had to look at it as a short I passed along the data I came up with in reference to the bear case.

[Castanza]

If I were a bear, I'd look at this churn chart (attached) from their investor day and think Gee, did the pandemic save PTON's churn metrics? It certainly seems like churn was elevated for about 4 quarters prior to COVID-19 happening.

 

If I take their last 4 years of results, they have sold $2.7 billion of products, i.e. treadmills, bikes, etc. Divided by $2,000, they have sold a product to approx. 1.4 million households, or 1.1% of total households, and 1.8% of households >$50k income. This fiscal year if their product revenue doubles to $3 billion, that's another 1.5 million households, and another 1% of the population (2% of target market). You can make your own extrapolations as to where this goes in a fitness market that is and likely will always be competitive.

 

What is more important is PTON is currently at about a $550 million connect subscription revenue run-rate, which let's say doubles to $1 billion next year.

 

How much of the value of this business is tied to the ongoing sales of products vs. the subscription business? Will the subscription business be able to support the cost structure of the total company at some point when product growth declines? Will SG&A costs ramp down when product growth does and will PTON be able to afford spending on sales and marketing at the same levels in the future when the product business growth decelerates (or even declines)?

 

Let me start this off by saying I have absolutely no freaking idea what the TAM for PTON is. That being said this is what I came up with.

 

Using the US as a proxy there are ~128 million households, I was able to find a 2017 stat of total gym members ships of 61 million representing 47% of households. If 30% of US households make over $100,000 and 47% of those have gym memberships that would put the US TAM at 18 million and their current market share at 5%. That does not include penetration into Canada, UK, and Europe.

 

I have no skin in the game here but just looking at the potential US TAM I think its safe to say that the runway is pretty large. What's sub 1% quarterly turn on 1 million subscriptions when you could potentially add millions of subscribers?  If you are a bear you will also want to think about how the Pandemic will change people's behavior. I'm not smart enough to figure that out.

 

I think its best to not stand in front of a freight train.

 

The issue with this is it ascribes no value to how difficult it is to capture market share. It's like the people who go on Shark Tank and say "This industry is 200bazillion dollars. All we need to do is capture .5% and we are bazillionairs!"

 

I'm not saying you're wrong. Just that investing from this frame of view is risky as it's pure speculation.

 

Please tell me more about my frame of view.... Like I said I don't own this and I am not short it. I am value investor PTON would never be in my portfolio for the reasons you point out, I am not a "spread sheeter". I had to look at it as a short I passed along the data I came up with in reference to the bear case.

 

I was agreeing with you, while also giving my personal pref that I don't like investment thesis with a foundation of "if we capture this much market share then...."

 

To me it's risky and judging by your first comment I think you agree. I wasn't criticizing your numbers  :D

 

 

[fareastwarriors]

Peloton to acquire fitness equipment maker Precor for $420 million

 

https://www.cnbc.com/2020/12/21/peloton-to-acquire-fitness-equipment-maker-precor-for-420-million.html

[Jurgis]

Peloton to acquire fitness equipment maker Precor for $420 million

 

https://www.cnbc.com/2020/12/21/peloton-to-acquire-fitness-equipment-maker-precor-for-420-million.html

 

AOL meet TimeWarner.  8)

[Gregmal]

LOL. Its only natural a $420M acquisition creates $4B in value.

 

Jokes aside its actually a fairly reasonable and sneaky good acquisition.

 

"Under the Peloton umbrella, Precor plans to make the award-winning Peloton experience accessible to more people through its long-standing relationships with hotels, multifamily residences, and college and corporate campuses.

 

This is pretty much what I was looking at for their upside catalyst a few posts ago. The at home market is small potatoes. Getting into real gyms is where the brand can really take off.

[Broeb22]

Does it say anything at all about the absurdity of their valuation that one of the largest targets in their industry is 1/100 of their value?

 

Precor is a household name and they sold for $400 million? But Peloton getting into the same business somehow makes it worth more?

 

Some of this stuff just doesn’t make sense.

[Gregmal]

Yea but in a Robinhood market nice headlines create shareholder value. It'll continue until it doesnt. There's quite a bit of evidence its nearing its crescendo. If you are smart enough to buy real companies during your bubble, or at least raise some capital, you'll at least have a better shot of making it through the unwind. I didnt catch the transaction structure, but it would be stupid if they weren't funding this with stock. Minimal dilution and effectively free money.

[jschembs]

Yea but in a Robinhood market nice headlines create shareholder value. It'll continue until it doesnt. There's quite a bit of evidence its nearing its crescendo. If you are smart enough to buy real companies during your bubble, or at least raise some capital, you'll at least have a better shot of making it through the unwind. I didnt catch the transaction structure, but it would be stupid if they weren't funding this with stock. Minimal dilution and effectively free money.

 

100% cash purchase

[Broeb22]

https://yetanothervalueblog.com/2020/12/peloton-fitbit-2-0-or-netflix-2-0-pton.html

 

Andrew getting in on the fun. I respect his work but I continue to believe there is nothing special about this company and that the pandemic is simply masking a business that is just like many other fitness businesses.

 

 

 

[Broeb22]

Affirm Holdings happens to be Peloton's lending partner on its 0% programs.

 

There is some good detail in their S-1 that points to some of the economics of the agreements and the likely percentage of PTON's sales being sold through 0% financing. For reference, total Affirm revenue in the year ended June 30, 2020 was $509.5 million, so 28% of $509.5 = $142.7 million of revenue from PTON. Using the data below, if PTON 0% loans come with a 10.0% fee paid by PTON, then the $143 million in revenue translates to $1.43 billion in Peloton product sales, which is almost 100% of PTON sales. 100% is way too high, but if you increase the 10% fee to 15% paid to Affirm then 0% financing revenue falls to $953 million, or 65% of revenue. That seems more reasonable, if perhaps a bit low. So 2/3 of Peloton sales occurred through the third-party financing program, where subscribers are locked in to a subscription for 39 months. Since ~90% of all the revenue PTON has ever generated has occurred the last 3 years, we have not really seen true churn for a significant majority of their subs. More importantly, I think you may be able to apply the churn metrics to their non-captive customers who are actually deciding every month whether to keep their connected fitness subscription. PTON states average churn 2017-2020 of 0.64%. If you say that 2/3 of the subs are captive, then 1/3 of the customers are actually choosing to churn or not. In other words, I think the underlying churn on connected fitness is closer to ~1.9%, and if the % of subs purchasing through 0% financing is closer to 75% then the numbers are quadrupled, not tripled ( to ~2.5%). Does any part of this seem incorrect to others?

 

 

 

Page 25

"Our top merchant partner, Peloton, represented approximately 28% of our total revenue for the fiscal year ended June 30, 2020 and 30% of our total revenue for the three months ended September 30, 2020. Our top ten merchants in the aggregate represented approximately 35% of our total revenue for the fiscal year ended June 30, 2020 and approximately 37% of our total revenue for the three months ended September 30, 2020."

 

page 101

"Merchant network revenue increased by $124.4 million, or 94%, compared to the fiscal year ended June 30, 2019. For the fiscal year ended June 30, 2020, merchant network revenue as a percentage of GMV increased to 5.5% versus 5.1% in the prior year period.

 

The increases in current period merchant network revenue were primarily driven by growth in GMV coupled with higher proportions of 0% APR loans and longer duration loans, and was partially offset by lower AOVs. Merchant network revenue growth is correlated with both GMV growth and the mix of loans on our platform as different loan characteristics are positively or negatively correlated with merchant fee revenue as a percentage of GMV. In particular, merchant network revenue as a percentage of GMV typically increases with the term length and order value of our loans, and typically decreases in higher APR loans. Specifically, 0% APR loans typically carry higher merchant fees as a percentage of GMV. GMV for the fiscal year ended June 30, 2020 increased 77% compared to the prior fiscal year. For the fiscal year ended June 30, 2020, the proportion of 0% APR loans increased to 43% of our total GMV, compared to 33% for the prior year period. For the fiscal year ended June 30, 2020, loans with a term length greater than 12 months accounted for 34% of GMV, compared with 27% for the prior year period. These increases were partially offset by a reduction in AOV to $609 in the year ended June 30, 2020, a decrease of 5% from $639 in the prior year period."

 

 

[Dalal.Holdings]

Well, it’s been a helluva ride. I’m out. I’m open to getting back in later if the price is right.

[Dalal.Holdings]

This is what I call a good deal:

 

https://www.prnewswire.com/news-releases/peloton-interactive-inc-announces-closing-of-1-0-billion-of-0-convertible-senior-notes-due-2026--including-full-exercise-of-initial-purchasers-125-0-million-option-to-purchase-additional-notes-301227245.html

 

$1B of 0% convertible notes ...

 

The notes are convertible at an initial conversion rate...equivalent to an initial conversion price of approximately $239.23 per share of Class A common stock, which represents a conversion premium of approximately 65% to the last reported sale price of $144.99 per share

[Cigarbutt]

This is what I call a good deal:

https://www.prnewswire.com/news-releases/peloton-interactive-inc-announces-closing-of-1-0-billion-of-0-convertible-senior-notes-due-2026--including-full-exercise-of-initial-purchasers-125-0-million-option-to-purchase-additional-notes-301227245.html

$1B of 0% convertible notes ...

The notes are convertible at an initial conversion rate...equivalent to an initial conversion price of approximately $239.23 per share of Class A common stock, which represents a conversion premium of approximately 65% to the last reported sale price of $144.99 per share

Thanks! That was interesting.

Disclosure: i don't know enough about this to short and accept that some can make money on it but it seems their model is flawed (and possibly a fad).

Barron's had a related piece on this aspect.

 

A potential conclusion is that the present environment allows for a full exploitation of momentum and related volatility (statistical at the expense of fundamental?). If you're the CFO for the issuer and get a feel for the market and you get those terms, how can you refuse?

So a 5-yr zero-coupon bond sold at (essentially) par, with a large (potentially huge) conversion premium, and some issuer protection. For a few minutes, i looked at the safety of the bond 'investment' and at the potential opportunity of the conversion value and came away with a strengthened conclusion that investing (like training) should be the result of independent thought.

Obviously the wisdom of crowds could apply.

The topic triggered an insufficient motivation to go out and move (it's -14 °C outside).

[Dalal.Holdings]

"It seems their model is flawed. And a fad".

 

Thank you for your unique insights...

 

I don't see too many flaws in a business where customers are willing to hand over thousands of dollars for some equipment and buy a (relatively) high priced subscription for their services....

 

Anyone who thinks this is a fad probably felt the same way about NFLX or the iPod back in the day. Back to your cigarbutts.

 

The bond issue was a good deal...for PTON, not the bondholders.

 

One reason for the high demand for the Peloton converts was that the implied volatility for the stock embedded in the securities was around 45%, one investor tells Barron’s. That is below the 60% implied volatility in Peloton equity options. This makes it appealing for arbitrageurs to buy the converts despite the lofty premium.

 

They effectively took advantage of IV to issue some low cost debt...

 

 

 

 

 

[Cigarbutt]

Thank you for your unique insights...

I don't see too many flaws in a business where customers are willing to hand over thousands of dollars for some equipment and buy a (relatively) high priced subscription for their services....

Anyone who thinks this is a fad probably felt the same way about NFLX or the iPod back in the day. Back to your cigarbutts.

The bond issue was a good deal...for PTON, not the bondholders...

::) You are correct. It was inappropriate to comment about a specific name (which is out of my league, like most other listed stocks), and without adequate due diligence, especially about the 'model'.

Also, consistently and reliably being personally involved on a trainer in my basement during the winter months does not translate into meaningful insights for this specific situation. Got it.

-----

The post was really meant to comment more on the funding environment. In the last few months, in some sectors i follow a bit more, there have been many issues which seemed (still seem) mind boggling: The Hertz attempt to issue common equity after filing, companies (like LVMH) issuing negative yielding debt and junk bonds trading below 4% last week and i thought (i was possibly wrong there too) that the PTON convertible issue was part of the same environment. i've clearly missed some of the recent enlightenment.

A nice thing about endurance is that one doesn't need to have special skills or to be bright and this can be observed sometimes in real pelotons, especially in multi-day races.