PTON - Peloton

[thepupil]

I mostly just look on with a mix of admiration, disgust, and confusion.

 

I don't know if you've read Adam Smith's 'The Money Game' but he covered all this stuff in the mid-70s.  It's Gerry Tsai all over again.  We need some kids to understand it for us.

 

So in like 2014 I did happen upon "the Go-Go Years" which really struck a cord with me when I was hearing about the wonders of platform companies and roll-ups like Valeant. In an interview, someone asked me what I thought of Colfax and Valeant, and I just kind of sheepishly said..."it seems more like the book the Go-Go Years than the Outsiders, but I don't know". the dude looked at me like I had three heads.

 

Perhaps because of my overly bookish and non committal response I was not rewarded with another interview.

 

Of course, Constellation Software is up 3-8x since then (not sure of exact date) so there was something to that whole Compounder movement.

[misterkrusty]

behold the rising # of visionaries who "get it" on PTON:  https://robintrack.net/symbol/PTON

 

by the way, Constellation Software is maybe, sorta, not exactly comparable.  Note the word "software" in the name. 

[Guest roark33]

I will add a few comments.

 

I have a wahoo kicker and a Zwift subscription.  You can use your road bike for indoors training and zwift creates virtual races that are just awesome.  Competition, not sure, but I really love the product.

 

I remember when SHAK went public, it was worth like 4B during the first year.  It's worth 2B now and has 10x as many restaurants (maybe 20x, who knows).  Just because something works and does well, doesn't mean the valuation is right. 

[thepupil]

behold the rising # of visionaries who "get it" on PTON:  https://robintrack.net/symbol/PTON

 

by the way, Constellation Software is maybe, sorta, not exactly comparable.  Note the word "software" in the name.

 

yes, I just meant the movement of valuing accretive acquisitions before they come to be. that was the innovation of the platform era and applied to a lot of the "Compounders/outsiders", and some of those were right in doing so [Transdigm, Constellation]. many were wrong [Valeant, Endo, Platform Specialty,Colfax, etc.].

 

a glorious extreme spin-off of this movement was the GP/LP Asset manager platform companies. AAMC trading at 100% of AUM because of all the capital it was going to raise comes to mind. May the Bill Erbey complex rest in peace. $30-->$1200-->$13 w/i in a decade, a cautionary tale for value oriented short-sellers everywhere

 

this is a SAAS company. Spinning as a Service, so it's cheap for a SAAS company  ;D

[Castanza]

"The shorts are all cheap introverts and don't understand that most people need human reinforcement, eg a coach or a class to lose weight."

 

Now this is the sort of genius-level insight that makes CoBF so great.  People need human reinforcement?  Arghhh!  Why didn't I realize that before?  Now I see that Peloton's $2,250 bike is the only way to get human reinforcement ... unless you own a different bike and subscribe to their  TV-production-quality classes for $12 a month. 

 

When I see that big-swinging-dick piece of art in my friend's living room I just pull an American Psycho and think "I am overcome with a wave of jealousy.  Tom's exercise bike is clearly more expensive than mine..."  If only my exercise options were confined to my home ... if only I could be that glorious hamster on a wheel ... if only my quads were the only muscle group that mattered...

 

I ain't one of those losers who think current sales are a function of everyone being stuck at home.  Don't they see it's so much more than that?  Thanks to y'all, I "get it"

 

FWIW, look up your local spin class prices. Around me the going rate is $15 per class and this requires you to schedule a time, drive to the studio/gym, etc. 5 days a week at $15 dollars would be what 3.9k a year? I don't think it's that hard to justify the price of the bike and subscription service to people who "spin".

[thepupil]

$15 is cheap. the breakeven is quick and the IRR is high on the bike if you are a fellow yuppie scum that goes to Soulcycle/Flywheel/etc regularly, assuming you value the at-home experience similarly (which many do not but many do)

 

SOULCYCLE

30 Classes

$825

[misterkrusty]

yes, I have no doubt that Peloton is a lot cheaper than a gym for anyone dedicated to spinning.  but I don't think Peloton's target market is the folks who can afford the time/travel/day-care to attend spin class in person.  I've heard it's more like the mom who can't take her eye off the kids.

[chrispy]

or anyone that fits the description provided by Castanza

[fareastwarriors]

yes, I have no doubt that Peloton is a lot cheaper than a gym for anyone dedicated to spinning.  but I don't think Peloton's target market is the folks who can afford the time/travel/day-care to attend spin class in person.  I've heard it's more like the mom who can't take her eye off the kids.

 

Really? Most of the spin folks that I know goto their spin classes during lunch and still do their Peloton's at nights or weekends.. They are hooked.

[misterkrusty]

Folks, it's time to talk about the elephant in the room ... yes, the $12 billion valuation.  Let's all gather 'round in a circle and take a deep breath...

 

Of course Peleton bikes are nice and the classes are great and lots of people love it.  Tell me why so many more people are going to spend all that money on the bike and stick with the subscription such that this company will grow into its valuation.

 

At the top of the page you'll see the words "value investors haven."  But this thread feels like it's 1999 and we're talking about CMGI on ragingbull.com  It's a paradigm shift! 

[BG2008]

Folks, it's time to talk about the elephant in the room ... yes, the $12 billion valuation.  Let's all gather 'round in a circle and take a deep breath...

 

Of course Peleton bikes are nice and the classes are great and lots of people love it.  Tell me why so many more people are going to spend all that money on the bike and stick with the subscription such that this company will grow into its valuation.

 

At the top of the page you'll see the words "value investors haven."  But this thread feels like it's 1999 and we're talking about CMGI on ragingbull.com  It's a paradigm shift!

 

Come on, we all know that valuations doesn't matter, sentiments and story telling and future promises matter more.  Who wants to own a bond like plastic packaging company trading at 6x FCF. Ewww, plastic.  :)

[Spekulatius]

So, the subscription price for Peloton bike is just $12.99? That’s pretty cheap. I recall it being $40 a while ago - did they lower prices?

[KJP]

Folks, it's time to talk about the elephant in the room ... yes, the $12 billion valuation.  Let's all gather 'round in a circle and take a deep breath...

 

Of course Peleton bikes are nice and the classes are great and lots of people love it.  Tell me why so many more people are going to spend all that money on the bike and stick with the subscription such that this company will grow into its valuation.

 

At the top of the page you'll see the words "value investors haven."  But this thread feels like it's 1999 and we're talking about CMGI on ragingbull.com  It's a paradigm shift!

 

Well, here's a two-minute effort to back into the current valuation.  Let's assume the company reaches "scale" in five years.  Current value compounded annually at 10% (12 x 1.1^5) = ~ $19 billion.  Let's assume at that point the company is trading at 22x earnings (which likely implies it's still growing).  That implies $860 million in net earnings (19 billion/22).  At a 20% tax rate (might be higher), that would be ~$1.1 billion in pre-tax earnings/EBIT. 

 

Let's also assume that $100 million of that EBIT comes from selling equipment and other ancillary items.  So, $1 billion in EBIT needs to come from subscribers.  Let's assume at scale the subscription business (including replacement CAC and growth CAC) runs at a 40% operating margin.  [i made this up.  It's a key input, but I'm not aware of a useful benchmark and too lazy to research it.]  That would imply $2.5 billion in subscription revenue (1 billion/.4).  At $40/month, subs are paying about $500/year.  That implies 5 million full-price subscribers.  [2.5 billion/500]

 

This is obviously wildly oversimplified and includes key variables that I just plucked from the air.  I don't have better grounding for my margin estimates because Peloton is in the too hard pile for me.  But the statement that Peloton is wildly overpriced is the equivalent of saying that something in the cocktail napkin model above is wildly off base.  So, what in that model is obviously not going to happen? 

[KJP]

So, the subscription price for Peloton bike is just $12.99? That’s pretty cheap. I recall it being $40 a while ago - did they lower prices?

 

No.  You're looked at the cheapo subscription that includes no Peloton equipment, and thus none of the cool features that come with it.

[Guest roark33]

Folks, it's time to talk about the elephant in the room ... yes, the $12 billion valuation.  Let's all gather 'round in a circle and take a deep breath...

 

Of course Peleton bikes are nice and the classes are great and lots of people love it.  Tell me why so many more people are going to spend all that money on the bike and stick with the subscription such that this company will grow into its valuation.

 

At the top of the page you'll see the words "value investors haven."  But this thread feels like it's 1999 and we're talking about CMGI on ragingbull.com  It's a paradigm shift!

 

This is a pretty interesting comment re: raging bull.  Oddly, the founder of that website, is shutting down his hedge fund raging capital.  His portfolio was hurt most by lots of shorts that will probably work out eventually, but have just crushed him the past few years.  Also, his longs, generally everything. 

[Kaegi2011]

Folks, it's time to talk about the elephant in the room ... yes, the $12 billion valuation.  Let's all gather 'round in a circle and take a deep breath...

 

Of course Peleton bikes are nice and the classes are great and lots of people love it.  Tell me why so many more people are going to spend all that money on the bike and stick with the subscription such that this company will grow into its valuation.

 

At the top of the page you'll see the words "value investors haven."  But this thread feels like it's 1999 and we're talking about CMGI on ragingbull.com  It's a paradigm shift!

 

All financial assets are connected.  There's at least a possibility that the company can compound from here.  Care to explain how negative interest rates work in Europe?  Not trying to derail the conversation, but it's not like 50 years ago when reasonably scaled/successful/high margin businesses are selling for mid single digit PEs anymore.  This is all relative. 

[Jurgis]

Folks, it's time to talk about the elephant in the room ... yes, the $12 billion valuation.  Let's all gather 'round in a circle and take a deep breath...

 

Of course Peleton bikes are nice and the classes are great and lots of people love it.  Tell me why so many more people are going to spend all that money on the bike and stick with the subscription such that this company will grow into its valuation.

 

At the top of the page you'll see the words "value investors haven."  But this thread feels like it's 1999 and we're talking about CMGI on ragingbull.com  It's a paradigm shift!

 

Come on, we all know that valuations doesn't matter, sentiments and story telling and future promises matter more.  Who wants to own a bond like plastic packaging company trading at 6x FCF. Ewww, plastic.  :)

 

[misterkrusty]

Kaegi2011 - that was a truly useless response.  I never made any claims about what P/E is appropriate.  I never said this couldn't trade at a high multiple.  Maybe it could.  But you haven't even bothered to come up with an earnings estimate upon which apply a multiple.  See KJP's response for how this should be done.

 

WTF do negative interest rates in Europe have to do with anything?  You are a moron.

 

 

[misterkrusty]

KJP-  thank you for being my only worthy "adversary."  In response, I'd suggest you take a look at this writeup (not mine, but I think it's well done):

https://www.valueinvestorsclub.com/idea/PELOTON_INTERACTIVE_INC/1135587058#description

 

Note the following: TAM estimate of ~1.8m  Churn estimate of ~16% (meaning they're gonna have to sell a whole lot of bikes on an ongoing basis just to stay flat.)  Company not showing any operating leverage despite rapid growth, so I'm not sure we can count on 40% EBIT margins

 

PS - Apple is now getting into excercise livestreaming, so I think the Apple of spinning is going to be Apple

[bizaro86]

KJP-  thank you for being my only worthy "adversary."  In response, I'd suggest you take a look at this writeup (not mine, but I think it's well done):

https://www.valueinvestorsclub.com/idea/PELOTON_INTERACTIVE_INC/1135587058#description

 

Note the following: TAM estimate of ~1.8m  Churn estimate of ~16% (meaning they're gonna have to sell a whole lot of bikes on an ongoing basis just to stay flat.)  Company not showing any operating leverage despite rapid growth, so I'm not sure we can count on 40% EBIT margins

 

PS - Apple is now getting into excercise livestreaming, so I think the Apple of spinning is going to be Apple

 

Pfft. If Apple wants the market leader they'll have to pay up and buy them out. Or maybe a merger of equals. Could call it Appeloton (pronounced 'apple-oton). 12 months of free spin class with iPhone purchase.

[Dalal.Holdings]

I’m sure it will be as successful as Apple taking on Netflix or Disney+. Or Spotify.

 

Maybe they can bring in hit from the 1990s Jennifer Anniston to run a spin class...

 

This Cook guy. Not a product person.

[mattee2264]

There is nothing special about the app on its own. Any company could put together a crack team of good looking and charismatic instructors and build up a following quite easily.

 

However they do have a pretty good tie in between the bike and the app. The bike is super high quality and they've obviously put a lot of work into designing it. In fact it is a better ride than that of their competitors who have been in the exercise bike market for decades. And being able to see easily on the screen your cadence and resistance and output allows the instructors to precision engineer your workouts and allow you to track your progress over time and also compete against other users all around the world.

 

The bikes are high quality but there is nothing stopping other companies bringing out equally high quality bikes. But then again Nike shoes are no longer superior to competing brands but still sell at a premium. So I think they can continue to be the prestige brand in the market. Of course there will be some people who will go for cheaper knock-offs. But it is an aspirational brand and people these days are prepared to pay a lot for fitness and there are a lot of advantages to being able to work out within the comfort of your own home.

 

I think the main weakness of the business model is that music is a huge part of the workout and you'd expect music companies to want to extract a lot of the economic rent. I notice they often use covers for a lot of the songs and perhaps that is a reason why.

[Spekulatius]

I don’t know about investing, but personally after reading this thread, I am more interested in buying a bike than before.

[Kaegi2011]

Kaegi2011 - that was a truly useless response.  I never made any claims about what P/E is appropriate.  I never said this couldn't trade at a high multiple.  Maybe it could.  But you haven't even bothered to come up with an earnings estimate upon which apply a multiple.  See KJP's response for how this should be done.

 

WTF do negative interest rates in Europe have to do with anything?  You are a moron.

 

Nice to meet you too.  You originally said:

 

"At the top of the page you'll see the words "value investors haven."  But this thread feels like it's 1999 and we're talking about CMGI on ragingbull.com  It's a paradigm shift!"

 

To which I gave a bigger picture response.  Apparently not satisfactory to your need for a detailed model proving how it'll grow into their valuation.  Fine.  Ignore it.  Just like you ignored BG2008's response that also did not include a detailed calculation, and Roark33's. 

 

Continue to look for your net nets and ignore interest rates as they are apparently useless.  I wish you the best. 

 

[KJP]

KJP-  thank you for being my only worthy "adversary."  In response, I'd suggest you take a look at this writeup (not mine, but I think it's well done):

https://www.valueinvestorsclub.com/idea/PELOTON_INTERACTIVE_INC/1135587058#description

 

Note the following: TAM estimate of ~1.8m  Churn estimate of ~16% (meaning they're gonna have to sell a whole lot of bikes on an ongoing basis just to stay flat.)  Company not showing any operating leverage despite rapid growth, so I'm not sure we can count on 40% EBIT margins

 

PS - Apple is now getting into excercise livestreaming, so I think the Apple of spinning is going to be Apple

 

I think that VIC writeup makes some good points, but it contains more straw-man than steel-man arguments for the company, driven in part by the analogy that's central to the author's thesis.  Is a maker of at-home exercise equipment -- or, in the author's words, "long-lasting hardware" -- ever going to be worth $12 billion?  Highly unlikely for the reasons the author states -- once competition arrives, they all become toasters.  So, analogizing to hardware companies like GoPro and FitBit is, to some extent, attacking a straw man.  The lengthy excursion into Tesla-land is similar -- it seems more aimed at expressing solidarity with a certain investing worldview rather than providing information relevant to Peloton. 

 

Instead, if Peloton could ever be worth its price, it has to be because the company is something besides a seller of plain old consumer hardware.  That "something else" could be the streaming service/exercise platform/whatever you want to call it aspect of the business.  But that aspect of the company gets short shrift in the author's analysis.  For example, although the author doesn't believe it will happen, he or she purports to provide financials for a world in which the company has 3.5 million subscribers to its streaming service.  We are told that even in such a world the company wouldn't be worth close to its then market cap of $8.5 billion.  But why is that?  3.5 million people paying $500/year is $1.75 billion in subscription revenue.  What is the operating margin on that revenue going to be?  The author never tells us, nor provides any real analysis of the issue.  Instead, we're left only with a "blended" EBIT margin that's not supported by any analysis.  As my half-baked model suggested, I think the economics of the subscription business at "scale" (whatever that is) is one of the key variables here, but it's glossed over in this writeup because too much focus is placed on the hardware aspect, which could never support the value of the business.

 

That being said, the author does include two good points related to ultimate EBIT margins of the subscription business, though they aren't really highlighted:  1.  the margins may be lower than you'd initially expect because the company will have to pay performance royalties for the music it uses.  But we're told nothing about how much this cost actually is or how performance royalties scale (or don't) with the number of subscribers; and 2. in an essentially throw away line, the author says "once I started researching Peloton online, NordicTrack started feeding me multiple video ads every day."  Therein lies a critical problem for anyone building a consumer business via the internet -- once you prove you actually have something people want, competition drives your advertising costs up.  In the old days, TV, radio and newspapers ads were driven by marketwide demand, so a few additional advertisers in your niche likely had essentially no impact on your advertising costs.  But in a world built on keywords and targeting, a few new competitors targeting the same people as you really can drive up your advertising costs.  The higher churn is, the more this is a problem, so the author's viewpoints on churn are useful, but again based more on belief than facts at this point.

 

So, if analysis of the operating margin of the subscription business isn't really doing the work in the author's analysis, what does?  It appears to be (1) the author's view of TAM, and (2) the basic principle of capitalism and competition driving reversion to the mean.  With respect to TAM, the author admits having no way to really estimate it, but his or her bias shows in the rather flimsy analysis of potential international subscribers.  The latter point about the effects of competition is, of course, usually true.  It's why the Bayesian stays away from stuff like this.  So, at the end of the day, the author took 9 pages to say "In my opinion, the number of people in the world who will pay $40/month to have cool spin classes at home is likely in the low millions, and competition will divide those people among enough companies, and drive down their economics, such that it is impossible for Peloton to be worth $8.5 billion."  My gut agrees with that, but I don't think the author has done much to show that the existing facts prove the truth of those beliefs.