Thanks, Bear. I will do my best to answer the questions -
You mention the 60% subscription margin…why wouldn’t it be higher? Perhaps because they have to pay the people teaching the classes?
Due to the cost of creating all the content, including the salaries to the instructors. Peloton pride’s itself on having the best instructors in the world so I imagine they are paying top dollar. Here is an excerpt from their latest 10-Q
Subscription cost of revenue includes costs associated with content creation and costs to stream content to our Members. These costs consist of both fixed
costs, including studio rent and occupancy, other studio overhead, instructor and production personnel-related expenses, as well as variable costs, including
music royalty fees, content costs for past use, third-party platform streaming costs, and payment processing fees for our monthly subscription billings.
As we are beginning to see them scale, the margins are starting to improve greatly as the fixed cost can be spread out. Yes, they are going to need to continue to create content but the cost to create isn’t like Netflix.
However, I will say the videos they produce are quite impressive. I was able to find this video from a couple years back. Take a look if you have never seen a Peloton class before. Make sure you catch the clip around 2:20 in which a live DJ was brought in to help raise the hype. https://www.youtube.com/watch?v=To5_6t0fzRc
I was wondering if you had other thoughts about Peloton’s optionality.
This is certainly an interesting question as I think there is a ton of potential for this company that most people don’t currently see. From the hardware perspective, you mentioned the rower but I know a cheaper treadmill is also in the works (the treadmill cost > $4,000 currently, yikes). I am certain there are more products in the pipeline.
One other area which I could see them expand to is for members to work with a personal trainer virtually via Zoom. I am sure there are many members out there that would pay a pretty penny to work one on one with some of the top instructors, or even in a small group along with a handful of other members, creating a little community.
As I mentioned in my introduction write up, Peloton is just starting to expand internationally. I think this could unlock a huge market for them. This might not be directly correlated to optionality, but this is an obvious next step for Peloton which should greatly increase their TAM immediately.
The last thing I can think of for Peloton to continue expanding is for its third revenue segment - apparel. This might not excite many investors, but I believe this third segment could become significant for Peloton if they decide to go that route. Athleisure is a rapidly growing market. Look at LuLuLemon, Athleta, or Outdoor Voices. I am seeing these brands pop up everywhere. I have started to see some Peloton gear when I am out, but with the cult following this company has, I could easily see their own apparel line start to take off.
I am not sure if Peloton can become a platform that other gyms/studios will use. I think what makes Peloton so great is the ability to access their vast library of content from the comfort of your home or wherever you are. I want to caveat all of this by saying I am not workout-aholic, I do not own a Peloton, and I do not consider myself to be a very creative person. I trust John Foley and management to leverage their strong brand and loyal members to innovate and create things I cannot think of myself.
Do you think profitability will continue after this quarter? Have they talked much about their long term model?
Peloton did not expect to be profitable so soon, here is their CFO, Jill Woodworth, on their most recent CC -
“We previously said we expected to achieve profitability in fiscal 2023, a goal we have achieved far sooner than originally forecast. The extraordinary events taking place over the past two months have measurably expanded our market opportunity and accelerated the ongoing shift to Connected Fitness.”
I do believe profitability will continue for Peloton in fiscal 2021 because of the strong growth of the number of subscribers along with the improvement of subscription gross margins. I expect they will do around ~$750M of subscription revenue in FY21 with gross margins of ~65%. Subscription revenue is clearly going to be the driver for Peloton long term and they know this. Here is Woodworth again on the CC -
“We plan to continue to prioritize Connected Fitness Subscriber growth and invest aggressively behind new products, software, fitness programming and international growth.”
I am still relatively new to Peloton, as I just starting following this company in May. The more I have researched, the more I have been impressed. It has grown into about a 5% position for me, but with the run up of most the SAAS names lately, I believe this is a business that still has potential for multiple expansion. Couple that with 100% growth and we have the twin engines!
I am pounding the virtual table on Peloton ahead of their Q4 report because I think it is going to be Zoom-esq. Like I said, I expect a massive beat this quarter, along with huge guidance for Q1 and FY21. Outside of Zoom and maybe Fastly, I cannot find any other company who stands to benefit more long-term from COVID-19. Like Zoom, Peloton was at the right place at the right time and had the amazing product and content to capitalize.