Introduction to PTON

My wife and I recently took a road trip up to Colorado (one of the benefits of working remote due to COVID) and listened to several podcast along the 17-hour drive. We are big fans of NPR’s How I Built This podcast and one of the episodes we listened to was an interview of John Foley, the Founder and CEO of Peloton from April 2019. I was aware of the company thanks to its advertisements, but I had never looked into the stock before. The podcast and increase in demand thanks to quarantine peaked my interest. Without further ado, here is an intro to Peloton.

Peloton was founded in 2012 by John Foley, along with four other co-founders (all but one remain with the company today in senior roles). At the time, Foley and his wife were getting into cycling classes at studios such as SoulCycle, but a busy life made it hard to regularly attend these classes. In addition to this, Foley would become frustrated that the best instructors would fill up weeks in advance all while becoming more expensive. He thought there had to be a better way to make these workouts more convenient and accessible to allow those to enjoy an instructor-led group fitness class from the comfort of their home on their own time. And with that idea, Peloton was born.

Here is their mission statement from their website, “Peloton uses technology and design to connect the world through fitness, empowering people to be the best version of themselves anywhere, anytime.

Peloton the stock

Peloton went public at $29/share on September 26, 2019 at a valuation of $8.1B. It had a rough first few days on the market and right around this time was the debacle of the WeWork IPO. After its first month on the market, the stock had lost over 18% of its value. Since then, the stock has recovered quite well and is up over 75% from its IPO and trading near ATH with a market cap of just under $13B.

Let’s take a look at why the stock is trading near ATH. Here are Peloton’s revenues (one thing to note, Peloton’s fiscal year runs from July 1-June 30 and they see a spike in demand in Q2 & Q3 around Christmas time):


Revenue 					
2018	 $56.2 	  $129.8  $142.3  $106.6  
2019	 $112.1   $262.9  $316.7  $223.3   
2020	 $228.0   $466.3  $524.6 	 

YoY %
2019     99.5%	 102.5%	  122.6% 109.5%	 
2020     103.4%  77.4%	  65.6% 

Now you might look at this and scoff, thinking that deceleration from 123% to 66% growth makes it a non-starter. But here is what is so interesting. Similar to Fastly, Peloton is seeing some major tailwinds thanks to COVID. I have read online that bikes are back ordered up to eight weeks. They simply cannot keep up with demand.

As a result, in their last report on May 6 (which included up to March 31), Peloton forecast revenue of $510M at the midpoint which would represent 128% growth YoY. Considering they’ve beaten their first two reports by greater than 10%, I think it is safe to assume we could see growth closer to 150% YoY.

Peloton reports three segments of revenue- connected fitness products, subscription and other. The fitness products currently include the famous bike and a treadmill, but I have read that a rowing machine is in the works. I don’t know this for sure, but I would guess the bike sales make up at least 75% of this segment. The subscription offers members unlimited access to all their on-demand and live content for $39/mo, pretty reasonable considering many folks pay over $100/mo for gym memberships. Peloton states that 94% of their subscription members are set up on monthly payment plans, creating a steady and reliable stream of income. The other segment represents a very small portion of total revenue and is mostly apparel. Here is a breakdown by segment:

 
Fitness % Revenues				
2018	73.1%	86.1%	83.0%	72.8%
2019	69.5%	84.2%	82.6%	70.9%
2020	69.1%	81.7%	80.1%	

Sub % Revenues				
2018	25.4%	12.7%	15.8%	25.3%
2019	28.3%	14.2%	16.1%	27.3%
2020	29.5%	16.5%	18.7%	

As you can see, fitness products make up the majority of the revenues, especially in Q2&3 when they sell a lot of bikes/treadmills for the holidays. With that being said, every single quarter reported shows that subscription revenue is taking up a great portion of sales YoY. This is what I like to see.

Let’s now take a look at the gross margins of each of these segments.


Fitness Gross Margin				
2018	40.9%	44.9%	43.9%	44.8%
2019	45.8%	42.8%	41.8%	43.4%
2020	43.0%	40.5%	45.3%	

Sub Gross Margin				
2018	33.6%	50.3%	35.1%	51.1%
2019	48.6%	45.6%	25.6%	52.3%
2020	56.1%	58.0%	57.8%	

Total Gross Margin				
2018	38.6%	45.3%	42.4%	45.7%
2019	45.9%	42.3%	38.1%	44.8%
2020	46.1%	42.3%	46.9%	

Peloton reminds me of Roku with the two big segments of revenue, but unlike Roku, Peloton actually makes money from their hardware sales. I would hope so considering the bikes usually sell for ~$2,500. What is exciting about this is the growth of the subscription GM. I expect this trend to continue.

Let’s take a look at one of their key profitability metrics, Adjusted EBITDA:


Adj EBITDA				
2018	 $(13.6)  $(0.8)   $(11.6)  $(4.3)
2019	 $(13.4)  $(14.6)  $(19.7)  $(23.6)
2020	 $(21.0)  $(28.4)  $23.5 	 

Adj EBITDA Margin					
2018	 -24.2%	  -0.6%	   -8.2%    -4.0%	
2019	 -12.0%	  -5.6%	   -6.2%    -10.6%	
2020	 -9.2%	  -6.1%	    4.5% 

The numbers are trending the right way. Their Q4 forecast calls for $60M in adj EBITDA, representing 11.8% margin. I like the way things are headed.

Lastly, here are some KPI’s Peloton reports quarterly that tracks membership and engagement.


Fitness Subs (in thousands) 				
2018	 123 	 169 	 218 	 246 
2019	 277 	 362 	 457 	 511 
2020	 563 	 712 	 886 	 

Quarterly Workouts				
2018	 2,501 	 3,231 	 5,902 	 6,223 
2019	 7,069 	 9,336 	 17,988  17,759 
2020	 19,171  24,345  44,155 	

AMWpS (avg. monthly workouts per sub)				
2018	 7.1 	 7.4 	 9.6 	 8.7 
2019	 8.9 	 9.7 	 13.9 	 12.0 
2020 	 11.7 	 12.6 	 17.7 	

All these numbers are also heading in the right direction. I think the most telling metrics are the number of workouts and avg. monthly workouts per sub. Obviously these numbers benefited in Q3 thanks to the quarantine life, but even prior to that they were showing great signs. This indicates to me that this is a product its users like and want to continue using.

Valuation:
Peloton currently trades at a EV/S of 8 on a TTM basis. I consider this to be very reasonable. Unlike some of our other stocks such as DDOG or COUP, I would argue PTON still has a good bit of room for its multiple to expand. I don’t expect to it reach 30x but I think 12x is fair for its growth prospects.

To conclude:
I view Peloton a bit like Livongo. Just as Livongo brings together technology and healthcare, Peloton is bringing together technology and fitness. I also see a company that is building an incredibly strong brand. Its members seem to love everything about Peloton and a lot of its business is derived from word of mouth.

I would argue the businesses is creating a moat with every new sub they add. The platform is unique in that thousands of people can enjoy a class together and motivate each other to work harder. I have read online of people making friends and building a community virtually through working out together in these classes. They are creating a network effect. Here is what Peloton has to say about that network effect:

“As the largest interactive fitness platform in the world, our rapidly growing and scaled Member base is a highly strategic asset. With our first mover advantage, we have achieved critical mass, which improves our platform and Member experience. As of June 30, 2019, on average, nearly 6,400 Members participated in each cycling class, across live and on-demand. As our community of Members continues to grow, the Peloton fitness experience becomes more inspiring, more competitive, more immersive, and more connected. Over time, Members are embedded in the Peloton community and we become a part of their lives, increasing the opportunity cost of Members leaving or potential Members not joining our platform.”

Full disclosure, I have never used a Peloton product before, but I have heard only great things. I also don’t know much about the industry. Peloton competes with gyms, cycle studios (i.e. SoulCycle), and a company called Echelon which offers a bike at a lower price without many of the offerings. I believe Peloton stands out because the platform and connectivity. Users seem to rave about the bike and classes. Maybe some of you gym rats believe this will be a fad, but I don’t see it. I see innovation and massive potential.

I think Peloton has a great runway ahead. Peloton has created a whole new market. They are beginning to offer more products (rower) and expanding internationally with a new storefront in Germany. I think this could spell a massive TAM (homes, hotels, and apartment complexes across the globe).

I saw a thread back in August in which a few people commented good things regarding the bike, I would love to hear more from anyone who uses it.

This company is a bit different than most discussed here, but I think it is worthy of consideration thanks to its impressive top line growth, subscription revenue, and of course the COVID tailwinds.

I currently have no position in Peloton, but am leaning towards initiating a position. I think their Q4 report will blow it out of the water and I believe all the new purchasers of the bike will translate to more subs, which is quite sticky (avg. net monthly churn has never been above 1% and who’s not going to pay $39/mo for a sub after forking over $2,500 for a bike??). Anyways, please tear apart my bull thesis as you see fit :slight_smile:

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Nice write up Major, I hear the treadmill cost $4500 dollars, which seems pretty expensive, not sure how many people will buy that. But I like your train of thought on the $39 dollar subscription. I used to think that was ridiculous but when you put it into context about how much a gym membership costs I can see the value. I am not an owner in PTON but your write up brings a lot of value to the board.

Andy

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The latest podcast of ‘InvestED’ talks about Peloton in detail including evaluation.
I heard the part 1 and am currently in part 2.
Invested podcast goes into ‘warren buffett’ style value investing but did an U-Turn and currently discussing "Peloton’

Thanks,
Praveen

Thanks Major for a very insightful writeup.

I’ve been a subscriber of Motley fool for a few months but only today felt I could contribute something! First of all a massive thanks of gratitude to Saul and all the members here for a life changing board.

As I was reading your post I was trying to remember where I had come across Peloton…I am in Uk and it just dawned on me whilst I was looking at Facebook I came across their ad. That ad was probably one of the very few ads I have ever clicked onwards onto. This shows they are doing something right!

You are spot on about the Covid tailwind and actually putting aside the high purchase cost
, the benefit Vs cost calculation is clearly not putting people off. I remember looking at that advert 6 months ago and thinking what a good concept.

The key statement for me is when you say “ I view Peloton a bit like Livongo. Just as Livongo brings together technology and healthcare, Peloton is bringing together technology and fitness.”

I couldn’t agree more. Being a medic I totally understand livongo. This is another concept which I can clearly understand.

My outstanding concerns would be;

  1. How long will the Covid tailwind last for?
  2. Do I have enough confidence to expect Peloton to overcome their competitors both in the technology/fitness field and the traditional gym model?

Thanks again for the superb write up. I am getting very excited about this company!

PharmoDoc

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I guess I am just cynical on the fitness topic. I have enough life experience to have witnessed wave after wave of the desire for fitness. Getting fit and staying fit takes a lot of devotion and effort. It is easy to want to get fit but difficult to do so. I view the target audience as always searching for instant gratification.

I will not invest in this company but if I did, I would routinely search websites for individuals selling their Peloton equipment. I think it would give me a good precursor to a drop in company’s performance.

For all that invest in Peloton, I hope this time will be different but only time will tell who is correct.

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Really good thoughtful and in depth write up.

I’ve looked at them but have never took a position in them. One of my hesitations is that there is a long history of boom and bust companies in the fitness industry as some fad catches a wave but fizzles out after a year or two. So far Peloton seems to be bucking that trend. It could be that the technology and connectedness of using it makes their bike more ‘sticky’ for users.

I’ve never used one of their bikes but I know someone that has one. They’ve had it about a year and I remember them saying how much the liked it at first. I recently checked in to see how it was going and if the bike was still getting used or did it become a treadmill “coat rack” that so many fitness machines seem to turn into. To my surprise the response to how often it was used was ‘all the time’, 4-5 times a week.

Maybe there really is something different about what Peloton is doing.

I also don’t know how sustainable it is. Could a competitor like NordicTrack or SoulCycle put a video monitor on a bike, stream some classes and be a viable threat? I’m not sure, but the combo of revenue growth with a razor/blade model of subscriptions has me interested, especially since the subscription margins should grow over time as more and more people pay to access the content.

Your hotel comment is one I find interesting. I could easily see higher end hotels putting in Peloton bikes so that their guests could access their personal workouts the same way you can log into your netflix on their tv’s in your room. I don’t think it would be a huge market but it would really help to extend their ecosystem and keep users engaged while away from home. It would also help marketing as those would be the prime target user to buy a Peloton.

They also have about 7.5% of their market cap in net cash after adjusting for there leases, and no look to be cash flow positive. So yeah, I think this is one I’m interested in digging into and learning more about.

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I also don’t know how sustainable it is. Could a competitor like NordicTrack or SoulCycle put a video monitor on a bike, stream some classes and be a viable threat?

Already have.

Nordic Track: https://www.nordictrack.com/exercise-bikes?gclid=CjwKCAjw2uf…

Soul Cycle: https://www.variis.com/bike?%243p=a_google_adwords&%24al…

Echelon: https://echelonfit.com/?gclid=CjwKCAjw2uf2BRBpEiwA31VZj9Ebux…

I saw a thread back in August in which a few people commented good things regarding the bike, I would love to hear more from anyone who uses it.

I’ve had a Peloton bike for about a year and I absolutely love it. I’m an avid cyclist with many century (100 mile) rides under my belt. Normally I ride whenever the weather permits, and I had an Echelon spin bike for years which I retrofitted with a power meter. I’d seen the Peloton ads for the past couple of years and didn’t make the plunge because of the price – even with the occasional sales it’s about $2,500. I finally made the plunge because my serious biking friends raved about it, and Peloton came out with a sales pitch where you can buy the bike on terms (about $65 / month, no interest, spread over three years) and you can cancel after 30 days and they will take back the bike, no questions asked.

The reasons I (and probably most others) love it are:

  1. The quality of the bike is superb – very well built, completely smooth and whisper quiet even during a hard ride, with a huge high-res monitor built in.

  2. Incredible instructors – I’ve completed about 200 rides with about eight instructors and they are truly world class, very inspirational, entertaining, engaging, dedicated, articulate, and sometimes sacrilegious. I don’t know what their recruiting process is but they have a way of finding and recruiting the best of the best.

  3. Access to a huge library of previous rides (in addition to the live rides) as well as classes in strength training, yoga, cardio, meditation, running, stretching, walking, bootcamp (bodyweight exercise), and running. During a live ride (or an encore ride, which is a previously recorded ride that everyone takes at the same time) you can see your heart rate, power output, cadence, and rank on a leaderboard that updates every few seconds. That helps you pace yourself and keep track of your performance relative to the other rides in real time. Peloton has so many members that even when I pick one of hundreds of past recorded rides, there are often dozens or hundreds of other riders taking that ride at the same time.

I’m sounding like an advertisement so switching back to the purpose of this discussion – From my experience I’d say Peloton’s unique value proposition is all three of the above points. Having said that, I haven’t invested in PTON, but only because I focus almost exclusively on high-revenue software companies. The comparison to LVGO is a valid point though, so I might reconsider. I remember the lessons from Peter Lynch’s “One Up On Wall Street” and Peloton does fit his model.

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Thanks for all the input, I will do my best to address some of the comments/questions.

I am in Uk and it just dawned on me whilst I was looking at Facebook I came across their ad. That ad was probably one of the very few ads I have ever clicked onwards onto. This shows they are doing something right!

I find this very interesting, because it reinforces my belief that Peloton does a fantastic job marketing and building their brand. Prior to doing some research, I had never once heard of Echelon or Nordic Track but I am also not a huge cycler/work out enthusiast. I just view Peloton as a cool brand, but that’s just one man’s opinion.

How long will the Covid tailwind last for?

They are obviously going to see a huge benefit in product sales in Q4 (as seen in forecast), but I would guess that type of acceleration does not last more than a couple quarters. Remember, prior to COVID they were still growing 65%+, albeit decelerating but it’s not like this is a company just seeing a sudden spike in demand.

Your hotel comment is one I find interesting. I could easily see higher end hotels putting in Peloton bikes

This is apparently already a thing, https://hotelfinder.onepeloton.com/, thanks to mess7777 for pointing this out.

Do I have enough confidence to expect Peloton to overcome their competitors both in the technology/fitness field and the traditional gym model?

I have enough life experience to have witnessed wave after wave of the desire for fitness. Getting fit and staying fit takes a lot of devotion and effort. It is easy to want to get fit but difficult to do so.

I also don’t know how sustainable it is. Could a competitor like NordicTrack or SoulCycle put a video monitor on a bike, stream some classes and be a viable threat?
Already have.

These are all very fair remarks and questions. As Btscheufler pointed out, the competition is not waiting around. Seeing as I am not a user, I cannot comment to how great the product is but I will post some comments from the thread back in 2019.

https://boards.fool.com/peloton-ipo-revenue-growth-34282632…

We have one, it is very well done and the classes are indeed good quality. - IRdoc

FWIW, love the product; as do several close family members. It’s addictive. - jasmos

We do have one of these bikes, and my wife has put in 150 rides over the past 6 months. - mess7777

Clearly they are doing something right. Maybe the competition is just as good, I cannot attest to that but what I can say quite confidently, is this is a kick-ass product that members love.

When Peloton opened their first store, Foley spent time at the store trying to sell as many bikes as possible. In the podcast mentioned above, Foley stated that if he could get a customer to sit on the bike and put in the headphones to get the full Peloton experience, there was a 50-50 shot they would buy the bike right there. That tells me all I need to know about this product.

I also want to point back to the financials here and also compare it to one of my favorite businesses.

Here is Peloton’s sub revenue again but this time with growth rates:


Sub Revenue 				
2018	 $14.3 	 $16.5 	 $22.5 	 $27.0 
2019	 $31.7 	 $37.3 	 $51.1 	 $61.0 
2020	 $67.2 	 $77.1 	 $98.2 	 

YoY Change %
2019	121.7%	126.1%	127.1%	125.9%
2020	112.0%	106.7%	92.2%	

Given their forecast and historical revenue breakdown percentages, let’s say PTON hits the high end of guidance at $520M in revenue. Let’s assume their sub % of revenue drops to 25% down from 27% given the higher bike sales. This would result in $130M in sub revenue in Q4, resulting in $372M in revenue and 106% YoY growth for FY20.

Just for reference, Coupa produced $390M in revenue in their most recent FY with 50% growth YoY. Coupa is valued over $14B. I know that is apples to oranges and not a fair comparison but interesting to consider nonetheless.

So here we see subscription revenue is growing at 100% YoY with 93% retention rates and avg. net monthly churn of just 0.46% in the most recent quarter. That is pretty damn impressive.

You might be right. There may be no moat. This might just be a fad and totally forgotten about in two years time. I cannot speak to how dominate of a moat they have, but with soon to be over 1M subscribers, who are completing on average over 17 works out per month (say what??), I feel confident their membership is not going anywhere anytime soon. I am just simply following the numbers, and the numbers look pretty damn good.

RW

I’ve been an owner of a peloton bike since November. I liked it then, but since the pandemic, it’s been an absolute godsend.

I’m working from home full-time now, and the convenience of the spike is unparalleled.

Certainly, you can buy a bike for much cheaper. As another poster mention the quality of this bike is amazing. When you put it all together, the bike a collection of classes, the leaderboard, the community, it’s an amazing value

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I got one for my wife last year (yeah, I guess I’m like the guy in the commercial) and she loves it and uses it 3-4 times a week. She had been going to spin classes 8-10 times a month but that was getting difficult with 2 little kids. Now she can take a break from her work (now permanently from home), cycle for half an hour, shower, and be back at work within an hour. Before it would take twice that time with driving.

I just don’t see it growing into a monster consumer product. Competitors are already there. While the vast majority will have a subscription, there isn’t much up sell. They have to grow a brand to really become big, and I simply don’t know enough about how to value a brand.

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Sorry, I accidentally hit submit before I could post my full reply. Here it is, and I apologize for the duplicate…

————-

I’ve been an owner of a Peleton bike since November. I liked it then, but since the pandemic, it’s been an absolute godsend.

I’m working from home full-time now, and the convenience of the bike is unparalleled.

Certainly, you can buy a different bike for less. As another poster mentioned the quality of this bike is amazing. When you put it all together, the bike a collection of live and archived classes (including strength training, yoga, meditation, stretching, and running), the leaderboard, and the community—-it’s an amazing value.

There’s always space in the market for a premium product. That’s what Peleton represents. Sure you could buy something cheaper but the question is do you want to?

Peloton is finding that there are many people out there who are willing to pay up for the full experience. If you want to buy a bike today, you may have to wait up to eight weeks. It’s an extremely sticky service. Their net retention numbers are extremely high. Don’t forget, this a subscription model.

Anyway, check out this news story for a nice overview.

https://apple.news/AWMuiTvhHQbuffyR3ZD-COg

Cheers!
Sanjay

Long PTON

I couldn’t bring myself to pay $2500 for the bike, or $4500 for the treadmill. Also, the $39/ month is only if you have one of those products with the bigger screen and connected data for leaderboards. This may be a good market for some, but I didn’t feel this was right for me so I looked into their app instead.

I started with a less expensive bike and the $12.99 digital subscription in the app. It is great. I agree with the point that part of what you are getting are amazing instructors. I also appreciate that they continue to expand their offerings beyond just cycling into many things fitness. They just added an Apple TV app which is also great. I believe that people will continue to use their app at the digital subscription rate and this is where they will see more subscription growth.

-Josh

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My bull view on how Peloton is a game-changer and not just another fitness fad.

  1. COVID-19 wiped out the competition: It’s hit indie fitness studios very hard, many have closed for good. It also hurt Soul Cycle bad and they are struggling to reopen at 1/3 to 1/2 capacity. The other competitor, Flywheel is toast.

  2. Content will be king: Like Netflix, Peloton’s superior library of content is what will separate them from all the other hardware plays in the market. Yes, everyone is going to come out with a bike. But it’s not just about the bike. The instructors and content matter.

  3. Cycling is only the beginning: Peloton has a treadmill and will release a rowing machine. Plus the app is now available on Apple TV and it has Yoga, Pilates, and other fitness classes that don’t require hardware to do.

  4. It will get cheaper than a gym: They are on track to lower the price of the bike. Peloton bikes cost just over $2,000, or $58 a month over three years. Their goal is to get it to $20 per person for two, which would make it competitive with a low-cost gym.

With only 886,100 Peloton subscribers, they could quadruple their business and still only appeal to fitness fanatics. For comparison Planet Fitness a mid-market gym had pre-CVOD-19 nearly 9 million members in North America.

Long Peloton, obviously.

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Golfcaddy,

I don’t know if we can make comparisons to gyms and fitness centers. While PTON is definitely being helped by the closings, I think most folks go to fitness centers for more than cycling or treadmills. In the centers I have been in lately, cycling was a small part of the equipment.

Gordon

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We have a Peloton bike, and my wife has put in well over 100 rides. I was actually banned from it because she loves it so much she is scared me using it to will reduce it’s longevity!

The key difference as others have pointed out is the instructors. They are personalities , and you can match an instructor to your mood. Wanna have an easy ride, choose a ‘fun’ ride. Other instructors are known for kicking your butt hard, etc.

As for the business model , it’s a very expensive barrier to entry , outside the reach of many. Once people are in , the subscription will keep coming…because even when not using it people will pay just in case they get back to using it again.

I did not invest, though I have been watching it since the IPO was announced. I just don’t see it growing and growing for too long before peaking.

2 Likes

I don’t know if we can make comparisons to gyms and fitness centers. While PTON is definitely being helped by the closings, I think most folks go to fitness centers for more than cycling or treadmills. In the centers I have been in lately, cycling was a small part of the equipment

Correct. And Peloton offers fitness classes like Yoga in addition to cycling. The difference is that it’s all done at home. Will people go back to the gym at some point? Yes. Will it be in much lower numbers? That’s what I would bet on. Particularly at the higher end, where the majority of Pelonton’s customers would be.

I understand what you are saying. I was trying to point out that gym rats I see are using step mills, stair masters, ellipticals, stationary bikes, (different than pton cycles), treadmills, weights, pools, etc. How many will give up this variety for one activity…We’ll see. Personally, I like working out in the gym where I can alter my routine. I have to confess that I have an old stairmaster at home that I an using these days.

I hope you are right in your prognostications.

Gordon