Why I sold out of Peloton

Investment Analysis Clubs Saul’s Investing Discussions
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Hi all,

I don’t like to share failures, so I’m writing this reluctantly; however, I believe it might be of interest to Peloton owners.

I was enamoured with the company and its products: the bike is a smash; the top line numbers are amazing; the customers are raving, and the reviews are generally very favourable.

The Tread looks to be a hit as well, and I was excited about it; until accidents reports surfaced, involving children (and pets) with, tragically, a death. As if this wasn’t bad enough, a video of such an accident was published online, with a threat to force the company to stop selling or recall the Treads.

Now, I realised a few cracks in the Peloton’s story that made me bail out:

  • with the multiplication of treads in homes, such accidents will only augment, not diminish
  • the attitude of the CEO, claiming that no Treads would ever be recalled, is at best confrontational; when called out by lawmakers, a more suitable attitude would involve at least some humility (I would also not like FB-style plain stonewalling against Lawmakers)
  • also the insistence on putting all safety responsibility on parents, when I believe that some basic safety measures should have been actively pursued (Why isn’t there some kind of barrier preventing being sucked under the machine? why are other treadmills not suffering from the same fatal flaws?)
  • the bikes and the Treads are potentially recallable if a major flaw was to emerge, deepening costs.

This added to the fact that most bikes are built in Taiwan, an island whose probability of remaining independent is rapidly unraveling.

I therefore sold, at a loss (20%), and it was a big position (10%), so total portfolio loss was 2%. Not so dramatic, but again, I don’t like to share defeats.

I hope for the holders that the outlook will improve; I think the company will find a solution to these problems; it is just that, for me, it has become too much to bear.

Hope this helps other hesitating holders to make a decision.

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I am also long PTON with a sizeable holding. I was initially looking forward to earnings to arrest the drop from 170, particularly to hear guidance around ramped up (acquired) production to meet demand. I am not so hopeful of a snap back these days as I feel that market sentiment is likely to drive more focus towards the bad news available (as per your post) rather than any improved metrics to be reported. However, market sentiment does change Eventually! I will have more patience and revisit after earnings. There is a chance I may need to remind myself that hope is not a strategy :slight_smile:

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Sedibald,

The only reason for your divestment in Peloton that would concern me is that the bikes are made in Taiwan, and they can always relocate their manufacturing facilities. While the Tread accidents and death are certainly unfortunate, anyone with a baseline of common sense can see the potential danger of treadmills in general. This is not unique to Peloton Treads. Treadmills have been around for a very long time and people have been posting treadmill mishaps on YouTube as long as YouTube has existed. I think the CEO’s response was appropriate. There is a safety key for these machines and the owners should bear the responsibility of maintaining safety with them just as a driver should bear responsibility for driving a car. I see this as a buying opportunity since this is clearly an overreaction by the market. Unless regulations are imposed banning treadmills in the home, this will be little more than a hiccup once enough time has passed.

Kevin
Long PTON 2023 LEAPS

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I also sold out of Peleton in March, but for a different reason, Here’s what I wrote: Why? I again decided I’d rather invest in Data, and the Cloud, which can increase forever, than in people’s subscriptions which are inherently finite and limited.

Look, the amount of data can double next year, and the year after, and the year after that, but can you see Peleton keeping ALL their subscribers, and adding to them a number which equals ALL of the current subscribers next year, to double once?

And then the year after, keeping ALL those doubled subscribers, and adding to them a number which equals ALL of those already doubled subscribers the year after, to double even a second time, much less a third?

That seems almost literally impossible, but I’ve been wrong before and I can be wrong again.

Saul

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my 2 cents.

Peloton story is more in line with Apple and Tesla than other tread / workout gears… Beyond ravishing reviews and user enthusiasm about their products, they are also building a large subscription revenue base that is higher margin and opens up other avenues…

On Taiwan - if there is a problem, it will hurt entire world economy… don’t forget worlds largest semiconductor company TSMC and most of its factories are in Taiwan… impact on Taiwan will hurt all big names including cloud… including cloud SW because it runs on HW servers for which TSMC makes most valuable chips…
(even when AWS, MSFT Azure and Google GCP buy chips from nVidia, Broadcom and many others, they all come from Taiwan… except just Intel)

So IMO, Taiwan is “too big to fail”… not just for US but also for Europe and China… therefore, everyone will want to keep it going… so I would not worry about it.

I am not in Peloton today because this year is going to be hard for PTON due to comps… more interested in SW / data / adtech world… but reasons in the original post on this thread do not resonate with me.

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I too sold out of peloton close to break even couple of days back. Here is the summary of the concerns and why I sold:

  1. Uncertain about COVID reopening and what that will do to future sales, short and medium term. (this risk I was willing to take until the following happened)
  2. Accidents were reported and the company took an aggressive posture instead of trying to understand and work with CSPC. Will this give a pause to the new buyers?
  3. Consumer reports dropped peloton Tread+ from its rating. I think people respect trade magazine like Consumer reports and a lot of people I know look at their reviews before making a major purchase. Would this add to the cloud hanging over Peloton? Here is the consumer report link:
    https://www.consumerreports.org/product-safety/safety-concer…
  4. Lot of lawsuits (Ambulance chasers, I get it). Still a very strong distraction for a growing company whose CEO will now have divide his focus from running the business and defending his company.

Like it or not, too much uncertainty. Given all the above, I felt the business might suffer in the short to medium term and how it gets over it is also uncertain given the company’s aggressive posture. So for me for now it is over.

  • Ruhaan
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I too sold out of a 4% position in Peloton recently and here is why.

  1. The brand took a hit. The short to medium term uncertainty surrounding the Tred is concerning. This is the next big revenue driver for Peloton and the bad press hurts the company and could delay or hurt tred sales. I believe Peloton is the Apple of fitness and will do well in the long run but don’t feel like waiting it out.

  2. It’s not the typical asset light stock I like to own. I was already getting annoyed with the issues of owning a company that makes “widgets” rather a company that mines data or software. The 100 million dollar hit due to supply chain issues and the manufacturing constraints come to mine. Also, the lower margins (~40 gross margins) due it being mainly a hardware play were also annoying. It’s a great company but owning a “widget” maker has its downsides.

  3. Expectations - Although the company showed no sign of slowing last quarter, the tough covid comps and the perception of the stock as only a WFH play don’t bode well over the short to medium term.

  4. Opportunity Cost - After reading about Zoom Info (starting with Bert and Saul)and its amazing FCF margins of 55% as well as its strong growth rates and strong value prop, I felt this company was a better one to own and swapped all my shares of Peloton for Zoom Info (ZI).

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First, to the point of their subscription being high margin. This is not the case. As far as subscriptions go the margins aren’t very good. Also note that the subscription with better margins is tied to equipment purchases. Worse, they are one per household. Even if the house has multiple pieces of equipment they still only need one subscription. The subscriptions that are not tied to the equipment have almost no margin.

I sold mine about a month ago for essentially the same reason Saul advocated above here. It came down to a simple point for me. Do I want to spend my energy trying to figure out if the supply chain is going to deliver product smoothly in the current environment where shipping lanes are gridlocked and we’re in the middle of a pandemic? Do I really want to be figuring out a widget-selling company in the exercise equipment industry when I could be in one that can scale as effortlessly as one in SaaS? If I have the choice between peloton and any other company in my portfolio growing at the same velocity today, why would I pick peloton?

I am absolutely OK with taking a loss because I can leverage that at tax time. If you think about it in those terms you actually make a percentage back by selling at a loss. Taking a loss is something I never think we should let stop us from giving our dollars the best chance to grow from that moment onward. All that matters is the future, not the past.

The lesson I choose for myself here comes from the fact that I said all along I didn’t plan on being in this company long-term but was taking it quarter by quarter to see how I feel. Do I really need this kind of complexity in my life? I have plenty of other companies that I want to own indefinitely; until something meaningful changes. Looking back, this whole thing was more over-thought than it needed to be.

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One of the flaws of the peloton machines are that they are not built with the same heavy duty components of commercial gym equipment. Think of it like this, most people who use the machines at home will run or bike for 3-5 hours a week. A commercial gym needs to be strong enough to handle 60-80 hours a week. I’m positive that safety issues will be addressed in new model designs. Don’t underestimate the purchase of precore this past year. Peloton is a hot name in home use bikes / treads and precore is the same in commercial gyms. They are a staple in most gyms across the country. I feel their growth is just starting. I’m waiting till they start incorporating the peloton technology in these commercial/hotel gyms. Many gyms lease their equipment the recurring revenue from the leases plus individual users monthly subscriptions will continue to grow. That’s my theory, I’m holding long term.

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I never bought in because Peloton felt (and still feels) like a fad. Good for the folks who bought in early and rode a rise, but that’s just good market timing imho. I hope you can keep your gains.

I was even more convinced when I started seeing their ads…these are not designed to appeal to anyone outside of a core group of either a) total body-worshipping sweat factories with money and space; b) people who wish they were “a” and have the means to pretend. In short, the market for this is extremely finite. They aren’t going to grow the total market of “people who workout at home” except by possibly luring people away from gyms if the people lured have the living space to devote to it. But the number of people who actually go to gyms past January is much smaller than those who work out all the time, so even luring gym-goers has a limit because those subscriptions will lapse and not be renewed.

The short assessment is that once they grow into the existing market, they will plateau quickly, and personally I didn’t want to have to predict when that point was going to arrive, because it feels like “soon”.

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The short assessment is that once they grow into the existing market, they will plateau quickly, and personally I didn’t want to have to predict when that point was going to arrive, because it feels like “soon”.

I agree with the short assessment.

FWIW I bought a bunch of PTON but decided early on it was a mistake. So I sold out in November 2020 and took a good hit doing so. At first I was taken in by the rapid growth and the obvious enthusiasm of users.But then I had second thoughts.

PTON was selling equipment of a special kind to a special group of aficionados, plus a cadre of folks who were driven to PTON as an alternative to the gym by the circumstances of the COVID lockdown. In addition PTON was having manufacturing, supply and supply chain problems.

All in all this was not a good scenario and the investment thesis seemed to violate a number of principles learned on this board. For example limited TAM prospects. Potential issues with hardware. No strong land and expand opportunities. Ultimately prospective customers had or would have good alternatives to PTON. Recurring revenue possibilities limited. No compelling universal need for this product.

When I thought about hardware issues back in November I focused on maintenance and repair and the need for eventual replacements. this latter not being a plus. I did not think about safety and liability (although I should have because I was concerned with that over a number of years) Now apparently some safety issues have emerged. There could well be others. Delivery issues have not yet been fully solved etc. If anything today’s thesis is weaker than before.

So I’ve been sans PTON for nearly six months now. I think my initial decision to buy was not well thought out and I paid the consequences.

c’est la vie

draj

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Look, the amount of data can double next year, and the year after, and the year after that,

There is a hidden assumption here that sales and profits will somehow keep up with data volumes. We
already know this to be false. Data produced by humanity had been doubling every two years since
2000. The stock price of NetApp and EMC did not even come close to that. What would be more
reasonable than to assume that twice the data will be twice the sales for those who sell you the
storage? It did not happen.

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While it looks like most here on this board have moved on from Peloton, I have chosen to go the opposite route as I tend to agree with what Chefneilde wrote - “I feel their growth is just starting.” They have four big growth drivers fixing to unfold over the next couple years which should continue to drive the top line meaningfully.

1. Tread release - I want to begin by acknowledging the recent tragedy and the way the company has handled it. I do not completely agree with the route Peloton took in addressing this matter either, but I do not believe this will have a material impact on their business. I might be wrong, but time will tell. Regardless, it was a sad event and one that should have never occurred.

With that being said, I am still very exited about this upcoming release. Let me remind you about what was said on the most recent conference call -

"And then on the Tread launch in the UK as John noted, we couldn’t be more excited, in fact, it’s exceeding our expectations… We think it’s one of the biggest growth engines for the company in the foreseeable future. And as you look at the U.K., there’s nothing we’re seeing. In fact, just the opposite or more bullish than we’ve ever been on the new Peloton Tread."

It does not sound like the company set the bar low either for their initial forecast. Again, from the same CC -

"I’ll take the U.K. launch and Tread, we’re taking estimates up full stop based on what we’ve seen in the U.K. And we felt like we had baked in a plan that had a strong forecast there. And based on what we’ve seen early, we we’ve taken it up.

As John noted, we’re going to be rolling out some orders here in the U.S. but the general availability moving it out 60 days because we think this is a rocket ship in terms of a product platform, and there’s a lot of demand for it."

Considering the demand they have seen for their bikes over the last year, I am going to take them at their word for this. If any company should understand rocket ship demand, it should be them.

2. Precor - This deal just closed and while I do not expect any big boost to revenue soon, I think this was a brilliant acquisition which will greatly expand their TAM. Let’s not forget the market liked this as well sending the stock up from $144 to $161 when it was announced in December. I am excited to watch this unfold and to learn more about their plans on this front later this week when they report earnings.

3. International expansion - Back in March Peloton announced they would be expanding into Australia and will introduce the bike and bike+ in the second half of 2021. This is just the tip of the iceberg. There is so much more room out their for them to expand and based upon their global trademarks, I expect we will see more announcements like this one before the year is over.

4. Subscriber growth - Peloton’s subscriber growth over the last two quarters has been 137% and 134% while their sub revenue growth has clocked in at 133% and 153%. They began fiscal 2020 with 511K subs and six quarters later now have 1.67M. Their latest forecast calls for 2.275M subs by year end which they will surely beat. This means their subscriber base will have more than quadrupled in two years!! This will be what drives the company going forward. Who knows, maybe they can achieve the 100M subscriber goal that CEO John Foley set out for them.

All this to say, I look at Peloton and think the best is yet to come. As a result, I have been holding onto my 7% position and adding to it over time. We have a company here that is churning out over $1B per quarter while growing over 100% YoY valued at less than $28B. I will be riding this story (no pun intended) for a while longer, but I have been wrong many times before. We should learn more on Thursday following their Q3 report.

Rex

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I agree with you and think PTON is in the early inning of its growth. There are many Peloton groups on Facebook. The Official Peloton Member Page on Facebook has 422.9K members. Just checked the message posted 6 hours ago has 1.2k like and 129 comments. I guess the engagement maybe higher than Tesla group. I owned a Peloton bike since January this year and never missed one day riding it.

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JUST SAW THIS.

Peloton is recalling treads after injuries and one death.
I guess when they say hold until there is a change of story, this is what they were talking about?

https://www.cnbc.com/2021/05/05/peloton-recalling-all-treadm…