Market Cap Thinking pt 2

Investment Analysis Clubs Saul’s Investing Discussions
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A lot has changed since I wrote about this concept a couple years ago: https://discussion.fool.com/market-cap-thinking-34004504.aspx

A lot of companies have grown more and faster than I could have imagined then, and I can imagine quite a bit. https://www.youtube.com/watch?v=rZBHits8JPI

They have done so well that they’ve become large companies.

Docusign is now a $38 billion company. ($38b is their market cap)
Zoom is now a $76 billion company.
Twilio is now a $39 billion company.

These are all going to have $1 or 2 billion or more in revenue this year, so these valuations seem reasonable to me, and I could even see them doubling or tripling easily…though depending on revenue growth rate, it could take several years.

Then there’s Shopify, now a $111 billion company. If it were to even double, it would be larger than Salesforce or Adobe. It’s worth considering if that makes sense. These companies have many times the revenue that Shopify has. How long can it grow revenue rapidly? Will it pass these still growing SaaS behemoths? How long will it take them to get there?

Likewise, Datadog, now a $29 billion company, will probably have between 600 or 700 million in revenue this year (565 is their lowball guide). They will have to keep torrid growth for several more quarters to prove they’re worth nearly as much as Docusign or Twilio. Will they pass these multi-year performers? How long will it take them to get there?

The companies I feel are most likely to grow 2x or 3x in the next couple years are Crowdstrike, Fastly, and Zoom. Crowdstrike will flirt with 800 or 900 million in revenue this year and is still a $22 billion company. Why is its market cap not about 50% higher? You’ve got me! They’re growth rate is about like Datadog’s, but maybe the market thinks DDOG can sustain their growth rate longer than CRWD.

Little Fastly will barely top 300m in revenue this year, but it’s also just an $8 billion dollar company. Plenty of room to grow revenue at a very rapid pace!

Zoom is the outlier. It became a large company overnight, but I am betting on them to keep innovating and therefore growing rapidly. Companies like Zoom don’t come along often. Can they grow revenue to 5 billion each year? 10 billion? If so, it’s easy to see them printing profits, and it’s easy to see how ZM’s market cap could double or triple in just a few years.

Caveats

As I point out above with Datadog, there are many things to consider when trying to guess what a company’s market cap could become in the future. So many that some (Saul included, for the most part, I think) don’t bother to guess. I’m certainly in that camp when companies are small. But at some point (perhaps somewhere between 1b and 2b in annual revenue…for any company not named Zoom?) we must concede that hyper-growth is not realistic. And hyper-growth is a big reason why these companies can defy expectations.

Opportunities?

Livongo is in an interesting spot. They are tiny, around the revenue Fastly has. (Maybe they’ll even hit 400m this year, but then Fastly could surprise too.) Livongo is growing even faster than FSLY. They’re also valued a little higher as an $11 billion company. But if their growth is sustainable, this is a huge bargain. I’m straddling the fence with a small position.

Roku is a larger position for me. They should crest $1 billion in platform revenue (high margin, non-hardware) this year. With their lower gross margin than some others mentioned here, it’s understandable that they’re valued a little lower, but at $18 billion currently, they could be a much bigger company if their success continue at such a rapid pace. Sustainability is, as always, the most important question.

Do you have any companies that you feel could be a lot larger in the next few years? Please tell us about them. Why do you feel that they could be larger? For instance, are they growing revenue extremely rapidly? Tell us why you think this is sustainable.

After all, companies that can be a lot larger in the near future…that’s what this board is about. We’re fortunate to have found many of them. I’m looking for some new candidates.

Thanks,
Bear

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Hi Bear
I would take a look at OTRK.
They have a similar business model to LVGO but instead of diabetes they manage behaviors health.
Their growth rate has been in the high double digits and possibly triple digits.
If you read
The latest conference call the CEO. Answers analysts questions comparing them to LVGO.
He says their revenue is only about a year behind LVGO but their market cap and valuation is much smaller
Curious what you think and Rhnaks for the great post as always Bear

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I looked at Veeva a few weeks ago, just a cursory check. Below is a summary of my findings, from their latest quarterly

  1. Total Q1(FY21) Revenues of $337.1M, up 38% Year-over-year
  2. Subscription Services Revenues of $270.2M, up 36% Year-over-year
  3. Q2 Guidance: Total revenues between $339 and $341 million (let’s call it $340M for the sake of calculations): a meet would represent a +39% YoY, right about the same YoY as Q1.
  4. Total 74% gross margin, modestly down from 75% YoY but up sequentially from 72%. (Gross margin on subscription revenue = 85%!!)
  5. Adj Operating Income: $129.7M, compared to $93.5 million one year ago, +39% YoY.
  6. FCFFO: $282M, up from $236M
  7. Adj. S&M/Rev = 13%, modestly down from 14% YoY
  8. Calculated billings down sequentially, down to $334M from $519M (the company says to not pay too much attention to this as there are factors not related to the health of their business that affects calculated billings).

Quick summary: Veeva’s gross margins are great, near the upper middle of some of the companies we follow, but their revenue growth of 38%, which good, is not as good as some of the others in the group, as shown below:


Company  YoY growth    Gross Margin
ZM       169%              69%
LVGO     115%              74%
DDOG      87%              80%
CRWD      78%              77%
Coupa     47%              70%
Okta      46%              78%
AYX       43%              91%

Veeva     38%              74%

Veeva has a large TAM (life sciences data market), SAM, COVID tailwinds, and strong management, as are most in the list.

No position in Veeva but definitely one to watch.

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https://www.publiccomps.com/tickers?items=ZM+%28Zoom+Video%2…

That Revenue Growth % is the only thing among the companies you just listed where VEEV isn’t right in the middle of the pack, except current FCF where Veeva leads the pack.

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I’m certainly in that camp when companies are small. But at some point (perhaps somewhere between 1b and 2b in annual revenue…for any company not named Zoom?) we must concede that hyper-growth is not realistic. And hyper-growth is a big reason why these companies can defy expectations.

GuyLucky posted an interesting article last year along those same lines. It’s a few years old but identifies the revenue journey between $100M and $1B as the proving ground for true hypergrowth. In an admittedly abbreviated sample I believe that range generally syncs up with many companies discussed here.

Post with Guy’s thoughts:

https://discussion.fool.com/below-is-a-link-to-an-article-i-beli…

Article alone:

https://www.mckinsey.com/industries/technology-media-and-tel…

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I would take a look at OTRK.
They have a similar business model to LVGO but instead of diabetes they manage behaviors health.
Their growth rate has been in the high double digits and possibly triple digits.
If you read
The latest conference call the CEO. Answers analysts questions comparing them to LVGO.
He says their revenue is only about a year behind LVGO but their market cap and valuation is much smaller
Curious what you think and Rhnaks for the great post as always Bear

I just looked at OTRK and it’s very intriguing. A quick search shows that it was mentioned (under its prior name of Catasys) a couple times on this board already by Nilvest at the end of March and by fish13 back in August 2019 when LVGO was being discussed. It has triple digit revenue growth (151% projected this year) and a telehealth model which is gaining traction. OTRK was growing well even before the recent shift to telehealth with 131% revenue growth last year. I just bought a very tiny position to keep it on my radar. Its EV/S is currently only 7. It’s a micro cap and I’m leery of putting too big a bet on it before more research.

Do you know how its model compares to LVGO’s?

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I believe recent IPO nCino also offer significant upside over the next years. Revenue growth is 50% in the most recent quarter, however this is dragged down by low growth in professional services. ARR growth was 66% in Q1 which was the second fastest growth rate over the last 5 quarters (no prior data), so there is currently no sign of slowdown.

Gross margins were 58% in Q1 expanding from 47% two years ago. Here again the higher mix of subscription revenue is the driver behind gross margin expansion. Long-term GM target probably around 70% in line with Veeva systems, as both use the Salesforce platform for which the costs are reflected in the GM.

Software is incredibly sticky as the whole bank operating system runs on this. NCNO is currently still in the landing phase but similar to VEEV, I see a lots of continued upselling by adding new functionality to the system. NRR at 147% is best in class.

Forward EV/S around 30, this is reasonable compared to some peers considering the 66% ARR growth:
Okta - EV/S of 30 with 45% revenue growth
COUP - EV/S of 35 with 45% revenue growth
VEEV - EV/S of 26 with 30% organic revenue growth

Given the stickiness of NCNO’s software, they deserve a relatively high EV/S.
Current market cap is around 6.2 billion, fairly small with lots of room for growth.
Glassdoor rating 4.6/5 and 99% CEO approval, always a good indicator.

I currently have a 5% position but will probably get to 8-10% in line with COUP and OKTA.

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I read through the conference call quickly. The one thing that caught my eye was their cash position. With debt of 33 mil and cash on hand of 12 mil with a 4.6 cash burn rate per quarter unless they start to generate cash instead of use cash they may need to borrow again or dilute soon. Will need to review BS to see when debt is due. Definitely intriguing though.

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Do you know how its model compares to LVGO’s?

Hi Remmdawg

they are in the field of Telehealth.
It seems they have a similar treatment method of chronic diseases. It looks like they are initially focused on substance abuse patients. It seems that they save the insurance companies money from their treatment.
The first slide in their Q1 slideshow says “Driving lasting behavior change for members with unaddressed behavioral health conditions through AI-powered engagement and tele-health enabled interventions.”

The CEO is Terren Peizer
In the Q1 call he mentions a tailwind from Covid
“Alongside these operational improvements, COVID-19 has created some unique opportunities for Catasys. The shelter-in-place orders have led to more people in our outreach pool being at their homes which makes it easier for our team to reach them. We had record highs of reaching over 20,000 members in March compared to an average of approximately 13,000 members reached in January and February and 5,200 reached in the first quarter of 2019. Further, these people are currently more open to accepting help than they previously might have been”

It looks like they are creating new avenues of treatment

"Looking forward, our pipeline continues to build, including several meaningful opportunities with leading managed care providers. One national Medicare Advantage plan that was previously delayed looks to be on track to launch at the start of the third quarter, and we are in dialogue for a significant expansion with an existing partner. We are continuing the design of new OnTrak disease area pilots for congestive heart failure and COPD, with the objective of launching two new pilots in the second half of the year. "

An analyst asks Terren
“A lot of times, I’m hearing investors comparing you with Livongo, and you guys are two of the leaders in telehealth right now in the market. How do you see Catasys relative to Livongo though?”

Well, we’re different companies. They’re – obviously, their main business is diabetes space. It’s a SaaS model. Most of their customers are employees. We’re the only pure behavioral health, telehealth play. And of course, we’re at the intersection of – our members have multiple chronic diseases and multiple behavioral health diseases. But as such, our member community is care and treatment-avoidant. The other telehealth and a company like Livongo are dealing with the treatment seeking. And we’re just structurally different. There’s definitely a more capital-intensive model than ours as well. I think if you look at our margins at scale, they all have a higher gross margin because we embed the cost of our care community and the cost of services provided.

But if you look at our EBITDA margin because we have significantly less marketing expense and they’re marketing straight to consumers, if you will. Our EBITDA margin should be slightly higher. But the only comparison I think you can make is we’re both in the telehealth industry. Their multiple is a lot higher than ours. But it’s interesting. If you look at their year, they reported last night. But in 2019, they did $169 million of revenue.

I think if you redo the math, and based on what I think our growth rate continues into next year, you could easily see that we could surpass that number. I’m not giving guidance yet for 2021. But you could see how we could be ahead of their 2019 number. And all last year, they traded around a $3.5 billion plus or minus market cap. This year, and last night, they reported, they should do somewhere around $296 million. And right now they have over a $5.2 billion market cap. So, I believe we’re only about a year or so behind Livongo. So, I look forward to being compared on a multiple basis, which I think we’ll get there."

He seems confident they are growing as fast or faster than LVGO and that their stock price should have room for multiple expansion.

This company also seems to be in the sweet spot of what Bear was looking for with revenue much lower than the 1 billion mark.

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some thoughts on OTRK vs LVGO and why I exited OTRK and concentrated on LVGO

  • OTRK is in the business of proactive management of behavioral health… they are primarily focused on addressing drug addiction AFAIK…
  • their per member price is much higher (I believe ~$6K / member / year vs LVGO charges ~$1K for diabetes and half that for behavioral health…

ofcourse OTRK solves different problem… Their pitch is that they get an addict off fatal path… but that means their business model is to get may be one or two years revenue from a member and then member would fall off (presumably because member is off the bad path)… so while they are doing good for society, their revenue base is not quite SaaS like recurring from same client… where as LVGO diabetic members likely to stay on board certainly lot longer than 2 years…

  • There was a short piece that got me to do a bit of dd…
    what I found was that number of logos they showed in their investor pitch were reducing over a period of two years… turned out that they were showcasing big names too early when they just them for trial… and as some of those names dropped out after trial, you see that logo quietly gone…

  • That led me to see that their revenue concentration is much higher among 5 customers with top customer is in 20% or 40% range (when I checked last)…

  • They are growing at enormous rate from a much smaller base… and FCF is quite far for them…

  • Most important is management - OTRK CEO Terren has his loud fans and louder detractors - he may not be a bad guy but he has been a wallstreet wolf… compare that to LVGO management and you will not think twice on where to put your money…

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“Given the stickiness of NCNO’s software, they deserve a relatively high EV/S.”

Rubenslash, what do you think about the fact it more than doubled at launch from expected 31 to 72.
Is it fine to brush aside this & still buy? Could it come back tumbling down back to 31?

What do you guys think?

Thanks,
Praveen

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it more than doubled at launch from expected 31 to 72.
Is it fine to brush aside this & still buy? Could it come back tumbling down back to 31?

It certainly could, but the 31 to 72 jump just means the company lost out of 50% of the potential proceeds because the banker poorly judged the market value. Their stock probably should never have been offered at $31, but either due to poor judgement or straight up dishonesty (allowing the bank to gift a big gain to some preferred customers) the IPO was priced far too low.

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The price was far too low and it makes me question what NCNO management was thinking when they priced it around 15x sales, leaving a lot on the table. There was no way that stock was going to open in the 30s. It traded as high as 91 but I took a small position at 69. Will buy on any dips.

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NCNO will never have the margins of Veeva as they have a much worse deal with Salesforce. Salesforce gave Veeva a total sweetheart deal which they will never repeat. NCNO are required to pay 20% of revenues to Salesforce so gross margins will never be comparable to other software names except those with some of kind of resource intensive model.

Veeva is a great company. Would highly recommend it to anyone here if you are comfortable with the valuation (presumable yes if you are on this board as it’s a fair bit less expensive than the popular stuff here). But a fair amount of this quality is enabled by Salesforce.

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“Given the stickiness of NCNO’s software, they deserve a relatively high EV/S.”

Rubenslash, what do you think about the fact it more than doubled at launch from expected 31 to 72.
Is it fine to brush aside this & still buy? Could it come back tumbling down back to 31?

What do you guys think?

Thanks,
Praveen

I did my own due diligence prior to the IPO and anticipated a valuation around 7 billion, it seems to be stabilizing around 6-6.5 billion now. The fact that it doubled doesn’t mean anything, it was significantly underpriced compared to public peers.

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GuyLucky posted an interesting article last year along those same lines. It’s a few years old but identifies the revenue journey between $100M and $1B as the proving ground for true hypergrowth. In an admittedly abbreviated sample I believe that range generally syncs up with many companies discussed here.

Thanks, Stocknovice. I remember that thread well. That’s exaclty the topic that’s been swirling around in my head. The market seemed to suss out, even back then, that ESTC wasn’t really a 60-70% grower. I’m baffled at ZS. At its scale, it should be growing much faster if it is truly an exceptional hyergrowth company worth of a $16 billion valuation and a PS over 40. But these are the mysteries of the market. I believe I will be best off ignoring outliers like ZS and sticking to my guns. The reason for my post yesterday is that I’m truly having trouble finding candidates. I don’t want to settle for the Zscalers of the world just because the Zooms and Crowdstrikes and Fastlys are hard to find.

OTRK

I highly recommend Nilvest’s post here: https://discussion.fool.com/some-thoughts-on-otrk-vs-lvgo-and-wh…. I agree with his concerns and would note a few more:

  • the name change is always at least a yellow flag, but they had ANOTHER name previous to Catasys: Hythiam Inc.

  • the 12m in revenue last quarter suggests that the customers they tout aren’t actually paying them much, if anything

If OTRK does actually exceed 90m in revenue this year, and they look on track to become the next Livongo, then I say happily by them then even if they’re 2x or 5x as expensive as today. This company definitely goes into the “prove it” category for me. I have zero faith that they will be able to do what they say they will.

VEEV

Veeva has been discussed here a lot. Most recently some fantastically thorough coverage from Bob:
https://discussion.fool.com/veev-first-impressions-34521669.aspx…
https://discussion.fool.com/veev-21q1-earnings-and-analysis-3452…

If you’re wondering why I have not bought, just look back at the first post in this thread. Veeva has well over 1 billion in annual revenue (will probably get close to 1.5b this year), and until the March quarter was growing at an under 30% pace. I don’t find it reasonable that the uptick was likely to continue, but as Veeva is now a $40.5 billion company, you’re kind of having to pay for it as if it is going to grow at 40% for the foreseeable future. In short, VEEV’s revenue and valuation is similar to TWLO and DOCU, but I believe VEEV will grow slower over the next 5 years (and in the next several quarters). I’m not interested in any of the three, because I just don’t think the growth is compelling enough to pay up like this. (I can say the same for DDOG, OKTA, and COUP.) This is the reason I only have meaningful positions in 7 companies right now. It’s hard to find ones that have it all!

NCNO

Thanks, Rubenslash. nCino is quite interesting, but do you think they can keep growing subscription revenue at 60%+ for years? The large professional services spend suggests a long sales cycle. We haven’t had great success with companies like that maintaining hypergrowth. Do you think nCino is different? Maybe tell us a little about their customers and what you think is nCino’s secret sauce.

Thanks everyone!

Bear

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Do you have any companies that you feel could be a lot larger in the next few years? Please tell us about them. Why do you feel that they could be larger? For instance, are they growing revenue extremely rapidly?

I will go ahead and throw Peloton into the ring. Here was my initial write up on the company → https://discussion.fool.com/introduction-to-pton-34527814.aspx?s…

They will be reporting their Q4 in August and guided for 128% YoY growth at the midpoint. I believe growth will be at least 150% YoY.

They are hovering around a market cap of $18B, so they might already be a bit bigger than you are looking for, but they have the revenue to match. They are going to do around $1.8B in revenue for fiscal year 2020 with growth of over 90% YoY. Growing revenue 100% and nearly a $2B run rate is incredible, I don’t foresee DDOG, CRWD or any others of my SAAS holdings accomplishing this feat.

Let’s look a bit beyond Q4 though. The bikes are currently back ordered about ten weeks from what I have read. I also read that Peloton does not account for the revenue until the bike is physically delivered. This means they have a ton of revenue expecting to hit the books for the following quarter, Q1 2021 for Peloton. With this in mind, I fully expect Peloton to guide for growth of 100% or higher for their next quarter.

Then, following Q1, we get into the meat of the year for this business. Q2 and Q3 are always strong due to seasonal demand around the holidays. I would not be surprised to see Peloton report growth north of 100% YoY for the next four quarters!! (including the upcoming Q4 report in August). And this is not off some puny base of $100M in revenue per quarter, we are talking about a business doing over $500M per quarter and climbing towards profitability.

Tell us why you think this is sustainable.

Peloton already pre-announced on May 12 they hit over 1M subscribers. I think this number will come in closer to 1.1M next report. Subscriber growth has be never been below 93% YoY and retention rate has never been below 93%. This rapid growth of their subscribing members coupled with impressive retention rates will be the reason why this growth will be sustainable. The best part of all, is subscription gross margin is going to be above 60% this quarter and I would bet it never dips below this again.

In addition to the $39/mo subscription, the new $13/mo subscription is starting to take off. This subscription is for those who don’t own the bike but want to access Peloton’s vast library of content for other work outs such as yoga. My wife and a few of her friends now subscribe via this service and absolutely love it. They canceled their memberships with gyms like Orange Theory and Empower because they get all they need from the $13 subscription.

I think too many people think of Peloton as a hardware company, similarly to Roku. This company is about the growth of its loyal subscribers, and they are executing very well. I expect an absolute blow out Q4 report and think it is worthy of a spot in all portfolios. I could see this company being worth $50B+ in a hurry.

Rex

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Thanks for posting this StockNovice, this is a fantastic article with actionable findings based on real data. I’d encourage everyone to read the article.
aside: I have high regard for McKinsey research, but I know McKinsey gives some folks heartburn that may have experienced them in management consulting engagements, and I get it. They come in, ask you what the problem is, ask what you’d do to fix it, then go out and find research to support your argument and then regurgitate your ideas back to you with data, all while charging you $500/hour to do it. I’m exaggerating a bit but you get my point. That said, I do value McKinsey data and research. side note: One of the McKinsey authors worked at Google (and now Dropbox) after her time at McKinsey and one worked at Oracle before her time at McKinsey, and at F5 Networks now, so they are in the middle of the SaaS business.

I read and re-read the article and was astounded to see the similarities in what Saul says about how to evaluate a company. McKinsey’s research involved about 3k companies (statistically significant) and pretty much validated Saul’s approach. Further, the research was done in ~2013 & 2014, well before any COVID dynamics. (some of the SaaS companies we follow are being labeled as “COVID stocks”, which is inaccurate and unfortunate, IMO).
Guy did a nice job of summarizing it but I’ll summarize the similarities and some notes in tabular form.


Factors contributing the most to long term success
McKinsey	   			Saul				notes
Revenue growth (CAGR >60%)	>35%, better if much more		Mck: best if you catch company before crossing through $100MM
Margin not as important	        high gross margins important	        high margins help ring out the top end of the market cap 
Large markets			large TAM, big potential		examples: LVGO TAM = $47B, CRWD=$32B in '22, FSLY=$35B
Good Monetization model	        high recurring revenue		        subscription model results in high recurring rev
Rapid Adoption			high customer growth, QoQ	        broad appeal best/avoid custom products; if growing fast, custom products not likely, due to limited engineering resources
incentives matter		high insider ownership                  creating proper incentives for the leadership to remain committed to the company, through act one and beyond.

Two take-aways

  1. As Stock Novice summarized, revenue growth trumps all, and McKinsey even quantifies it: Supergrowers”: companies whose growth was greater than 60% CAGR when they reached $100 million/yr in revenues were 8x more likely to reach $1B in revenues/year than those growing less than 20%. (satisfies Saul’s second criteria, behind being recommended). The problem is that there simply aren’t many companies growing at 60% or more per year whose letters don’t begin with a Z, L, C, D, or P. Literally, there are like only 5 or 6 in the mix of companies that have the other attractive criteria. That’s where I believe Saul’s other criteria helps suss out the potential winners.
  2. Growth matters more than margin, but margin does help, and this supports Saul’s approach. The article doesn’t really highlight this but the data suggests margin, EBITA margin in this case, helps ring out the top end of the market cap, moving a company from a +10% Market CAP CAGR over industry average to +23% market cap CAGR over industry average. This is a statistically significant increase and I’m surprised the authors didn’t highlight this as much. Their takeaway was: Growing revenue faster has twice as much impact on share price as improving margins. But if you can find a company with both growing revenue and high margin, all the better, right? This supports Saul’s suggestion of valuing high gross margin, which is a first order variable to EBITA margin.
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Subject: Re: Re: Market Cap Thinking pt 2
Author: PaulWBryant | Date: 7/24/2020 6:49:04 AM | Number: 69853
GuyLucky posted an interesting article

Bear. You have posted extensively on this subject. A while back you summarized your methods for estimating valuation. I can’t find the reference. Would you be so kind as to provide one or more references.

Thank you.

draj

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Peloton already pre-announced on May 12 they hit over 1M subscribers. I think this number will come in closer to 1.1M next report. Subscriber growth has be never been below 93% YoY and retention rate has never been below 93%. This rapid growth of their subscribing members coupled with impressive retention rates will be the reason why this growth will be sustainable. The best part of all, is subscription gross margin is going to be above 60% this quarter and I would bet it never dips below this again.

In addition to the $39/mo subscription, the new $13/mo subscription is starting to take off. This subscription is for those who don’t own the bike but want to access Peloton’s vast library of content for other work outs such as yoga. My wife and a few of her friends now subscribe via this service and absolutely love it. They canceled their memberships with gyms like Orange Theory and Empower because they get all they need from the $13 subscription.

I think too many people think of Peloton as a hardware company, similarly to Roku. This company is about the growth of its loyal subscribers, and they are executing very well. I expect an absolute blow out Q4 report and think it is worthy of a spot in all portfolios. I could see this company being worth $50B+ in a hurry.

Rex,

You make quite the case for Peloton. A couple questions:

  1. You mention the 60% subscription margin…why wouldn’t it be higher? Perhaps because they have to pay the people teaching the classes?

  2. I saw in the June thread you linked to that Peloton will release a rowing machine. I’m thinking of upscale apartment complexes and hotels that could potentially carry the whole peloton line. But I was wondering if you had other thoughts about Peloton’s optionality. Could they become a platform for these types of classes? In other words, are they just going to hire enough instructors to cover their subscribers, or could other classes take place over their platform where they just charge a fee? Could the $13/month be expanded to several levels based on types of classes, engagement each month, etc? I’m sure you’ve thought of some other things I haven’t too, so please share.

  3. I’d love to see them be profitable this quarter! (Hardware of course makes up a lot of their revenue, and though hardware margins seem solid, there’s a limit to how much they’ll be able to grow hardware revenue, and it won’t be recurring, so they really should be turning a profit.) They had a ~$50 million non-recurring litigation expense in G&A last quarter, so without that they would have been very close to break-even. With almost twice as much EBITDA guided for this quarter, I think they will be profitable (analysts think so too). Rex, do you think profitability will continue after this quarter? Have they talked much about their long term model? Whatever the case, what you said here bodes well for next quarter: The bikes are currently back ordered about ten weeks from what I have read. I also read that Peloton does not account for the revenue until the bike is physically delivered. This means they have a ton of revenue expecting to hit the books for the following quarter, Q1 2021 for Peloton.

Thanks so much for bringing this to the board!

Bear

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