I take some time to read PTON’s shareholder letter, which can be downloaded here: https://investor.onepeloton.com/financial-information/quarte…
Ending Connected Fitness Subscription 277 362 457 511 563 712 886 1091 49.2% 50.8% 51.6% 46.8%
Notes: This is their definition: A Connected Fitness Subscription means someone is paying for a subscription, including a “pause” to their subscription for up to 3 months.
Their subscription gross profit went up from $31.9M (2019 Q4) to $68.8M (2020 Q4). Note that their Q4 ends on 6/30.
I then take a look at their consolidated statements on p. 23.
Jun20 Mar20 Dec19 Sep19 Jun19 Mar19 Dec18 Sep18 HW Product Rev. 485.9 426.4 389.1 160.8 162.3 265.6 225.5 80.4 Subscription Rev. 121.2 98.2 77.1 67.2 61.0 51.1 37.3 31.7
October-December is a holiday season that they usually get double sales. Subscription steady increase – I’m a bit surprised why they are not proportional to the product sales. After all, I can’t find a reason someone buys a Peloton and choose no to subscribe. The only possible explanation is hotels or gyms where they just want to get the hardware (say bike). Still, this is a stretch.
Apparent there’s no sign that everything is going to be back to normal in the next three months. Given the COVID setup where all gyms (and flywheels, etc.) are close, it’s expected that their Sep20 (6/1/20-9/30/20) HW Rev is going to be beautiful. It’s probably at a range between 555-605, assuming that COVID contributes to two months of sales in 4/1/20-6/30/20. And thus their Subscription will be at least 155-180.
Holidays can only be a tailwind to their sales. Period. As a result that the earning calls for the next two quarters are going to be beautiful. Even we have vaccines, I believe people will not STOP their subscription. Emotionally speaking, if you already pay $2000+ for a high-end bike, there’s no reason for not paying $39 for a month, which is equivalent to (or less than) a one-hour indoor cycling class.
I don’t foresee any competitor except the controversial “prime bike.” I consider these copy-cats are opportunities for them to reap profit from people who cannot afford the product or chose not to pay for a $2000 bike.
I notice their profit margin for subscription is 56.7%, meaning that they have to pay about 43.3% to produce content. I expect this profit margin to go up as digital content can be easily reproduced. It becomes a moat for them because of their 1.09M subscriptions. I can tell that Apple Fitness+ is going to compete with them by providing cycling or running classes. While Apple is formidable, I don’t see a reason to worry at this moment. Firstly, it’s a new service and we don’t know whether it will become mainstream. I feel Apple Fitness is targeting all kinds of indoor exercises like HIITs or Cardio and most users with the Peloton watch programs when using their bikes and treads. I see no reason people will stop Peloton subscription and fully switch to Apple Fitness ($9.99). They need to get an iPad, a bike iPad holder, and an apple watch for a reason to save $30 per month. If cost is a concern, they probably won’t buy these high-end bikes or treads at the beginning.
I never use the product but given the churn rate (subscription) at 0.5-6%. As a comparison, the churn rate of Netflix is about 11%, and people say 11% is amazing.
I think Peloton will destroy business including orange theory fitness, flywheel sports, etc. People will still go to the gym for weight training or group class, but I see no reason to run treadmills or ride bikes with others.
I also believe they might introduce some gamification to destroy companies like zwift. We will see.
And they have positive EPS for the first time. I think this is a good sign. While I don’t mind investing growth companies with negative EPS, knowing that they are profitable is a good sign.
I think exercising is a habit. During the COVID people are trained to have such a habit to exercise at home. Once it becomes a habit, unless there’s a reason the habit is bad or something is significantly better, people don’t like to change. I also started indoor cycling (on some $300 indoor bike during COVID) and that’s why I believe I will keep doing it even the COVID is over.
Lastly, I checked their numbers before the COVID. The growth seems to be pretty healthy. The Revenue YOY between Sep19 (6/30/19-9/30/19) and Sep18 is more than 100%.
I’m interested in hearing a different opinion of why PTON is going to be a bad idea. While PTON is not a SAAS to companies, it seems to be a paradigm shift for some group exercise programs. And I can’t find any competitors today.