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.
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.
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