• Nick Burgess

Investing in Peloton Interactive - A Pandemic Flash In The Pan?

Updated: Feb 11

Peloton Interactive - King of the Pandemic Trade

As I've mentioned more times than I care to count on this site, the world has been turned upside down in the last two years. Hell, this blog was even born out of the result of the COVID-19 pandemic. Humanity will look back on the second quarter of 2020 as being hell on earth: people were shut in their homes, businesses closed and we had to get creative.

Businesses transitioned to remote-first lifestyles, which gave rise to Zoom Video after their video conferencing technology took the world by storm. Fear of grocery stores led to private company Instacart bursting at the seams with revenue. Online learning companies like edX saw their numbers pop as people took time to up-skill and learn new, more marketable business lessons to improve their lot in life. Netflix churned out content at a ridiculous rate, and streaming exploded. But what about those that wanted to get in shape?


Sure, you could take a run outside, do some push-ups by the bed or even become one of the literally thousands of people who got a pandemic puppy so you have a reason to get outside. But what if you need that group setting and that extra bit of motivation to workout every day? Well that's where Peloton came in, with their fitness equipment being some of the most mentioned products during the most intense stretch of the pandemic. But is this company a flash in the pan that experienced a perfect storm of a lock-down pandemic in order to move merchandise, or are they onto something here? Can they last as a true player in the space? Today, let's take a look at those questions and more as I dive into Peloton Interactive, the manufacturer-in-chief of every avocado-eating douche millennial's living room equipment.


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UPDATE (2/11/2022): Peloton's had a big couple of days. On their earnings call on Tuesday, February 7, Founder John Foley stepped down as CEO of the company and has been replaced by new CEO Barry McCarthy. Also coming out of the earnings call was the news that Peloton cut 2,800 jobs, which resulted in angry employees invading the first company-wide meeting conducted by McCarthy. Peloton also slashed their revenue guidance (again) for the year. Shares rallied over 50% on the week with the mixed news.

 

Top-Line Numbers

  • FY 2021 Revenue: $4.02 billion (+120.27% YoY)

  • FY 2021 Net Income: -$189 million (-163.97% YoY)

  • Q3 2021 Revenue: $805.10 million (+6.23% YoY)

  • Q3 2021 Net Income: -$376 million (-642.57% YoY)

  • Market Capitalization: $10.32 billion

What Peloton's Business?

Peloton Interactive is a digital fitness company that creates exercise equipment for connected workouts. Essentially, they make stationary exercise bikes, treadmills and a new movement tracking camera that allows users to join in on group exercise classes from the comfort of their own homes. Each class is taught by certified Peloton instructors that have now essentially become celebrities in their own right, and classes are centered around different themes like Christmas music or Taylor Swift.

The entry point for the equipment is steep. The entry level basic bike starts at $1,495, but if you want to add accessories on top of that then it can get all the way up to $1,945 for the "Bike Family" package. Then there's the "Bike+" that is like the normal bike but also has a weight training component to it. That one starts at $2,495 and you can again accessorize all the way up to nearly $3,000. Then there's the treadmill. The treadmill runs the same price range as the Bike+, but the treadmill is also enormous. Like "only thing that will fit in that room" big. It also comes with a laundry list of potential issues that I'll touch on in a bit.

The peloton bike+
The Peloton Bike+

Finally, there's the actual membership to the classes themselves. The prices I listed above are just for the physical equipment to get through your front door. If you want to actually use the machine you just sold a kidney for, you're going to have to start selling your own plasma, too. Those plans are $39 per month, assuming you have one of the aforementioned pieces of equipment. They also offer a version of their plan that only requires a phone or tablet to get started, which clocks in at $13 a month for home workouts.



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How Did They Get Started?

The company was founded by already very successful businessman John Foley, who in 2011 pitched the idea of a high-end fitness experience for people who were at home or had little time to commit to a formal class. He pitched this idea while serving as an executive at Barnes and Noble. For any younger readers, Barnes and Noble was a book store chain that were essentially vehicles for Starbucks to expand their locations. Let me back up: a book is like a non-digital version of what you're reading right now.


Getting back to Peloton, this is actually the first company I've covered so far that finds their origin on Kickstarter, another blast from the past. Following an initial seed funding round to get a prototype out the door, the first bike sold on Kickstarter for $1,500, and so the company was born.


Following the highly successful Kickstarter campaign, Peloton gained steam in the fitness industry, being lumped in with other high-luxury brands like Lululemon, meaning it had officially hit "cult" status. Following further investment from private equity, the company eventually reached a $4 billion valuation on the private markets by early 2019, shortly after crossing the one-million user mark. The company then went public on September 26, 2019. What good timing that was.


Peloton's Bull Case

First Mover Advantage

Peloton invented this space. Did it invent the stationary exercise bicycle or the treadmill that sits in the corner of the room silently judging you? No, of course not. But Peloton did invent the home-based group class on said exercise equipment, and that means something.


The company has invested heavily in rolling this out correctly, and I have to say that they've done an excellent job. They are way ahead of their competitors in having very elaborate, modern, millennial-focused studios with good looking, high-energy instructors like you'd find in any standard exercise class.

The investment in the studio and trainer infrastructure also allows them to easily transition from cardio-focused classes to strength training, which is the crux of the Bike+ and treadmill products that the company hope generate increased revenue. They can also use these studios for yoga and Pilates courses, which are the keystone courses of the new(ish) $12.99 equipment-less plan that is meant to entice new users.


The trainers themselves are also interesting to discuss, because they've effectively become walking, talking billboards for the service. Each one of these trainers now has tens of thousands, if not hundreds of thousands, of social media followers to which they promote their classes they're teaching. One instructor, Cody Rigsby, became so popular that he participated in the latest season of Dancing With the Stars.


The Valuation Is Currently Pretty Attractive

Talk about spinning a negative into a positive. Look, at one point during the height of the pandemic, Peloton's share price was at an all time high of around $171. Obviously, since then, the stock has come crashing back down to a current level of $31. But if you believe in this company long term, then you could view this as a fire sale. I do think there are some interesting reasons to believe here:

  1. Analyst sentiment is strong. Of the 31 analysts that cover the company, five of them have slapped Peloton with a "Strong Buy" rating. 15 more have a "Buy" rating on Peloton, with only two issuing an "Underperform" rating. The consensus price target is also at $69 (nice) from these analysts, indicating one hell of an upside.

  2. Obviously the pandemic really fueled exponential growth in this company, but the company was growing pretty rapidly pre-pandemic too. It's likely to find its way again as the management team seems wildly competent (on the business side at least).

  3. These costs don't just go away for the consumer. Let's say you purchased a Peloton for $2,500 and you used it during the pandemic but not so much lately. Are you really going to cancel your $40 per month membership? Not likely because you sunk $2,500 into the thing two years ago, and that's tough to walk away from! Maybe you sell it to recoup some cost. That means that someone else is going to have to pay that $40 a month now to use it. These memberships don't just walk away.

The company does seem set to continue the recurring revenue that they established a base for during the pandemic. It just looks like the growth will be a bit slower.


The New Product(s?) Looks Like a Needle-Mover

Hot off the heels of cutting their revenue guidance by over $1 billion, Peloton has announced the release of a new product called "Peloton Guide." Essentially, it's a $500 camera connected to a heart rate monitor that will focus more on strength training and less on the cardio classes that Peloton was founded on.

The Peloton Guide
The Peloton Guide

This is a direct shot across the bow to the competition that we'll touch on in a minute, and provides a pretty bare-bones fitness experience for those that still want to participate in the Peloton lifestyle. The focus on strength training doesn't just come out of left field either: according to Peloton's chief product officer, strength training classes are the fastest growing segment of users in the Peloton system, so this product will allow them to take advantage of that expanding audience very quickly. But there is one more product that could be really interesting that is currently a rumor...


According to the "Pelo Buddy" blog, trademark and supply chain documents out of Peloton seem to be hinting at some sort of rowing machine coming from the company. This would be a direct competitor to the Hydrow company that has found so much at-home success, as well as capitalizing on the growing interest in rowing machines thanks to the likes of boutique fitness companies like Orange Theory.


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Both of these could be needle movers for Peloton, as they attempt to recapture segments of their audience that have momentum in the market place. But where are they recapturing these users from?


Peloton's Bear Case

They've Invited Competition (Apple)

Being the first mover in an industry isn't always a good thing. Did you remember that Yahoo actually beat Google to the search engine game? Of course you didn't, because Google came to market with a product that kicked the crap out of Yahoo and displaced it as king of the Internet. Well, Peloton has a similar threat in that they seemingly picked a fight with Apple.

Apple Fitness+ on an iphone with an apple watch
Apple Fitness+

Apple has been in the fitness game for years; we just never think about it. The release of the Apple Watch in April 2015 opened the door for Apple to break into fitness. Now having a heart rate monitor essentially built onto a user allowed a health integrated app, as well as third party developers to take advantage and release their own health and fitness apps. Now, however, Apple wants to play.


Apple recently announced the release of "Apple Fitness+" along with the new Apple Watch Series 7 line. Apple Fitness+, because everything needs a fucking "plus" now to seem cool and modern, features guided fitness classes from yoga to strength training to meditation. Sound familiar? That's right: Apple is out to eat Peloton's lunch. It's also cheaper than Peloton's cheapest plan, clocking in at $9.99 per month. Hell, they're even giving away three months for free if you buy a new Apple Watch. Peloton is officially on notice for the general connected fitness crowd.

But Peloton still has the advantage when it comes to the actual exercise equipment, right? Ummm...no, not really. Thanks to Peloton essentially serving as the proof of concept for the entire industry, the zone has now been flooded like Tom Thibodeau on a bender. Lululemon completed their high-profile acquisition of connected strength training company Mirror in 2021, and they're already knocking that partnership out of the park.

Peloton competitor Tonal, with new partner LeBron James
Peloton competitor Tonal, with new partner LeBron James

Tonal, another competitor to both Peloton and Mirror, hired LeBron fucking James as a spokesperson and company partner. NordicTrack grabbed their own spokesperson in Olympic legend Michael Phelps and owned the Olympic-adjacent advertising space during the 2021 Summer Games in Tokyo. I also previously mentioned Hydrow, which counts Justin Timberlake and Lizzo as celebrity equity partners.


What I'm getting at here is: Peloton is in trouble. They took it upon themselves to assume the start-up costs, the risk, blazing the trail and they showed success, which opened the door for every other company with an internet connection and deep marketing pockets to come in and take over. So how does Peloton fight back? With clever advertising! Oh wait...


PR Issues

This is almost becoming a running segment on this blog, but each week I have to highlight the boneheaded PR moves that these companies engage in like they don't employ a bunch of highly paid corporate types, so here we go again.

I previously discussed Peloton gaining cult status up until it went public in 2019, so by that nature, many of us were pretty unfamiliar with the company up until that point. Well most of us got a lot more familiar with the company during the 2019 holiday season thanks to their first television ad that went down like a joke in the cancer ward.


The ad depicts a 30-something already pretty in-shape and attractive mom who is gifted a Peloton for Christmas, so she begins to use the device and log her journey through a series of video clips. Those clips span over a year period, after which the woman, Grace, shows no noticeable difference other than being weirdly indoctrinated into a workout obsessed culture.


The ad was universally panned, especially by regular viewers on the grounds of perpetuating negative body-image issues. But then, something amazing happened: Ryan Reynolds grabbed the actress and put her in an ad for Aviation Gin that played on the negativity of the original Peloton ad, and all was...forgiven? Well, if it worked the first time then maybe it can work again? Let's chat prestige television for a minute.


And Just Like That...

The name of the game in prestige TV at the moment is "reboot." Whether it's the reunion of the "Friends" cast, rumors of a reboot of "The Office" or recap podcasts like the newly announced "This Is Our Show" about "New Girl," reboots are everywhere. Well, possibly no reboot gained more attention in the last 12 months than the relaunch of "Sex In The City," now named "And Just Like That."

and just like that with sarah jessica parker
Courtesy of HBO

In the new show, three of the original four women have returned to fill you in on life in the modern day from the perspective of being an older, rich, white woman in New York. Main character Carrie has been married to "Mr. Big," portrayed by Chris Noth, for years. Well, in the first episode of the show *SPOILER* they kill off Mr. Big. How? He has a heart attack after riding a Peloton.


Other than being an egregious miss by Peloton's corporate communications and marketing departments, the move was controversial and caught many viewers off guard. Well, Peloton capitalized on the lessons from their last mistake, as well as the wave of publicity they'd suddenly gained, by hiring Ryan Reynolds to once again be their knight in shining armor. Reynolds's production company released an ad less than 24 hours later that showed Chris Noth alive and well after having just finished a Peloton workout, along with one of their instructors. The ad humorously plays off the character's death and lists all of the beneficial "side effects" of a Peloton ride like it's the end of a pharmaceutical ad.

What Peloton did not count on, however, were serious sexual assault allegations against Noth by multiple women the day after the ad was released. The ad was pulled immediately and all good-will Peloton had gained was gone in an instant.


NMPA Lawsuit

2019 was a weirdly tough year for the company considering it's when they went public. In addition to their ill-fated holiday ad, Peloton was sued by the National Music Publisher's Association (remember them from their other lawsuit with Roblox?) for $150 million for using music in their classes without the proper copyright. I just have to take a second to ask: for a company that, at this time, was valued around $4 billion and had hundreds of people on staff, did they not take a second to ask about music copyright? How is that possible? Anyway, Peloton, rather than pay to obtain the correct permissions, just changed the music to royalty-free tracks like a YouTuber putting in as little effort as possible. Users revolted as the quality in classes dipped, and the NMPA took advantage by bumping the suit number up to $300 million. This was later settled out of court with undisclosed terms.


The Tread+ Controversy

I wanted to have a bit of fun with the above lawsuit because I'm unfortunately about to talk about something pretty tragic. In May 2021, the U.S Consumer Product Safety Commission issued a public warning about the safety of Peloton's treadmill product, stating that it was unsafe for use around children and pets after reports that upwards of 40 children had been injured around the machines, including the tragic death of one child. The USCPSC also released a horrifying video of a child being dragged underneath a Tread+ which I will not post here but here's the link if you absolutely have to see it. Other parents also sued Peloton after their children suffered third degree burns after getting stuck under the machine, as well as lawsuits around broken bones and damage to pets.

So how did Peloton respond? They denied it. CEO John Foley's initial response to the findings referred to them as "inaccurate and misleading" as well as showing frustration that the USCPSC went public with their findings. However, Peloton did quickly change course and offered voluntary recalls of the treadmill products, enacting safety features to help prevent more incidents from happening. Not quite content to have this controversy behind them, though, they made the "Tread Lock" safety feature only available to those with an active subscription, rather than to just anyone that owned the physical piece of equipment. This meant that users of the free "Just Run" feature did not have access to the new safety feature until they purchased an active membership. After catching plenty of shit for this too, Peloton rolled out an update three months later to give all users access to this feature.


The Bottom Line

Look, I was going to hammer the company again on the "reopening trade," but I think I've beaten the dead horse enough: I'm not a fan of this company. I know people with Pelotons, and they love them. They happily pay the monthly fee and ride every day to stay in shape, and good on them! However, I can't help but think that, as the world continues to reopen and get back to normal, people won't want to be cooped up in their homes anymore, even if it is just for a 30 minute bike ride. They'll want to be out among people again, doing things in a social setting, which is completely non-conducive to Peloton's business model.


I heard recently on a podcast that Peloton could be a potential buyout candidate for a large company looking to get deeper into the fitness space. The podcast laid out the case for why Peloton, at its current $10 billion market capitalization, could be an instant win for Apple, were Apple to acquire it. Apple finds $10 billion in its couch cushions each weekend, so this would be a drop in the bucket for them that is best-case immediately accretive to their earnings, and at worst-case it's a division that they later either ax or sell off without so much as a whimper. However, I think there's a company out there that would benefit much more from a Peloton buyout than any other: Nike.

the nike logo

Think about Nike for a minute. They sell everything that has to do with fitness, except the fitness itself. They sell the clothes, the shoes, they have a partnership with Apple on the Watch, and hell, they even sell the lifestyle. I could very easily see Nike's new revenue lever as a "Nike x Peloton" type branding, with the specific shoes and gear to go along with the workouts. Additionally, as I covered last week in my Roblox deep dive, Nike is also getting into the Metaverse with their recent Roblox partnership, and they're now selling digital goods and services. So why would Nike not leap at the opportunity to not only snag a built-in digitally connected user base with recurring revenue, but also be able to leap into the actual fitness part of the Nike total fitness experience? Obviously the deal isn't perfect, and $10 billion is a LOT to a company of Nike's size, but I could see these two companies as a match made in heaven.


I'm spending a lot of time on Peloton's potential as a buyout candidate because I honestly don't see that many silver linings to this company at the moment. I can't really figure out why analysts are so hot on this one at current levels other than it's suffered one hell of a drop from its all time highs and might look set to rebound? It's a tech company, which means it's going to suffer from the intended Fed rate hikes this year, and like I said before, I just don't think it'll have a lot of leg once the world is fully open again. For me, this one is a stay away provided that Nike doesn't jump in and snag it.


Short-term: Short

Long-term: Short


But what do you think? Do you own a Peloton, or shares of Peloton Interactive? Let me know in the comments below, and don't forget to sign up for my email list so you never miss a post!

 

This article is for entertainment purposes only, and should not be interpreted as investment advice. For individual situations, please contact an investment professional. Please do your own research. The author does not have a financial interest in Peloton Interactive (PTON).

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