Peloton grew to almost a 10% position for me by the end of September, but I cut it significantly throughout October as the price rose. By the end of October is was only a 3.4% position. After listening to Thursday’s earnings call, I’ve actually reduced it some more. Here’s why.
Not every company has to be SaaS, but we should realize why we like SaaS – and a lot of it boils down to recurring revenue and Dollar Based Net Retention Rate (DBNRR), which combine for almost certain growth each year. Growth rate may slow, but growth is almost inevitable. Because the recurring revenue gets you to where you were last year, the DBNRR adds to it, and then you target new customers. So perhaps you see something like:
Year 1: $100m revenue
Year 2: $200m (100% growth)
Year 3: $350m (75% growth)
Year 4: $550m (57% growth)
Year 5: $800m (45% growth)
With PTON, where about 80% of revenue is not recurring, you could very well see something like this:
Year 1: $1.8b
Year 2: $4.4b (144% growth)
Year 3: $6.5b (47% growth)
Year 4: $6.0b (negative 8% growth)
Year 5: could be up, could be down
The point is that without recurring revenue, at some point (who knows when) you’ll have less revenue than you had the year before. It could be year 20. It could be year 3. My simplistic thesis is that if for Peloton revenue grows year after year until year 20 (or something like that), it someday be worth a lot more than it is today. But if revenue tops out in the next year or two, I doubt it will. And I’m not smart enough to know which is more likely.
I’ve seen a few people say that their PTON position is among their largest, and I believe a couple people might even have a 20% or 25% allocation. I’m not going to try to tell you how to invest your money, but I urge you to take a hard and humble look at the numbers and ask yourself: how sure are you annual revenue will get to $10 billion? $20 billion? How many years can they grow it significantly before they top out? My point is not that Peloton can’t get there – it’s that I don’t think any of us can really have a clue what demand will be a year or two from now…much less 5 or 10 years from now. And unlike a SaaS company, with something like Peloton, you kind of need to.
In July PTON was around $62 and an $18b market cap when Rex posted this: https://discussion.fool.com/do-you-have-any-companies-that-you-f…
90 days ago when they reported a blowout quarter, he and I both made the case PTON should be worth $40b (it was his idea…I just agreed): https://discussion.fool.com/peloton-q4-report-34614564.aspx
And now PTON’s market cap has exceeded $40b (342.1m shares * 125.46 per share = about a $43 billion market cap). At $18b Peloton was a no brainer for me. Now that it has more than doubled, it’s no longer a no brainer.
Thank you so much for bringing this one to my attention, Rex! $62 to $125 in just a few months…that’s amazing, and much more than I expected!
For anyone who still has a large position, I hope Peloton grows into a huge company over the next several years. Predicting that just isn’t what I’m good at.