Peloton seeks an IPO valued at $8 billion

News:

https://www.bloomberg.com/news/articles/2019-02-25/peloton-is-said-to-pick-goldman-sachs-jpmorgan-to-lead-ipo

Some metrics:

Get to know Peloton:

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This tweetstorm is gold. Enjoy!

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Not the most exciting document you’ll ever read - TL;DR - Peloton just filed for an IPO :biking_man:

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Call me sceptical, but I’d be wary of their IPO.

It’s fitness, and that goes through crazes and extreme hype cycles. People generally don’t seem to like exercising, so they jump onto the next bandwagon in search for something cool and new in the vain hope that it’ll be the magic bullet that will keep them going.

Who remembers Barre from 2005, Zumba in 2012, Spinning in 2013, cross-fit in 2017, HIIT in 2018, etc? Some of those have proven scientific benefits and are here to stay, but none of them have recovered the crazy lofty heights of the top of their hype cycle.

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Personally I wouldn’t touch i with a barge pole, but I must admit I’m amazed how much people are willing to pay to use an exercise bike…

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I’m amazing place even find space for an exercise bike, let only the cost!

The metrics are impressive:

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I personally wouldn’t go near this stock. There are a few contenders with similar products such as Zwift and Echelon etc. The pricing also seems massive. It could definitely work out but I am sceptical, especially at the valuation.

Another thing about their business is you pay a pretty hefty overpriced £2k minimum for the bike and then you have to pay £40 a month to even get anything much from it. A lot of people nowadays just buy a turbo to put their bike they can take out on the road with, not just stuck in a room, which is much cheaper and pay the Zwift fees for much cheaper.

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I’m interested in this. Good product, nice numbers and the potential for recurring revenue.

Unlike WeWork, this at least looks like a tech company. Stationary bikes, treadmills and monthly app subscriptions. Those who have bought their stuff seem happy. After you splash out $2,200 on a bike, $39 a month is pocket change.

In August 2018, they raised just over half a billion $ at USD 4 billion valuation. If the current valuation is circa USD 8 billion, that’s roughly 8x Sales since their EBITDA—whichever way you calculate it—is negative.

Its backers - according to TechCrunch reports:

In total, Peloton has raised $994 million in venture capital funding, according to PitchBook. Its S-1 filing lists CP Interactive Fitness (5.4% pre-IPO stake) — an entity connected to the private equity firm Catterton — TCV (6.7%), Tiger Global (19.8%), True Ventures (12%) and Fidelity Investments (6.8%) as principal stakeholders, or investors with at least a 5% stake in the company.

From the pre-IPO S-1 filing:

Fun marketing speak:

We are democratizing access to high-quality boutique fitness by making it accessible and affordable through the compelling value of our unlimited household Connected Fitness Subscriptions and attractive financing programs for the Bike and Tread.

Young people earning $75k or under would spend $2k+ on a stationary bike:

We continue to broaden our demographic appeal—our fastest growing demographic segments are consumers under 35 years old and those with household incomes under $75,000.

Maybe they meant passive monthly income of $75k?

The co-founder, CEO and Chairman has some tech background (although… Barnes & Noble?):

Before our founding, Mr. Foley served as the President of eCommerce at Barnes & Noble, Inc., a retailer of content, digital media, and educational products, from August 2010 to June 2012. From March 2005 to August 2010, Mr. Foley served as the co-founder and Chief Executive Officer of Pronto.com, a price comparison service platform and a subsidiary of IAC/InterActiveCorp, a media and internet company.

Most top people have a half a million dollar cash salary, which is not bad compared with “The Church of We” IPO:

It has a multi-class share structure where Class B holders—top execs etc—have 20 votes per share (fyi Mr Callaghan is True Ventures’ founder):

Some funky chart which breaks all the rules of good charting:

EBIT (operating profit) negative (sales and marketing are eating their lunch but are needed for growth I guess), fat gross profit margins on hardware (treadmills and bikes), low double digit gross margins onf software (subscriptions):

Low “churn”:

Our Members are as devoted to us as we are to them—92% of our Connected Fitness Products ever sold still had an active Connected Fitness Subscription attached as of June 30, 2019.

If you don’t use Peloton bikes or treadmills, you can pay under $20 a month to enjoy the classes:

Our content is available on our Connected Fitness Products through a $39.00 monthly Connected Fitness Subscription, which allows for unlimited workouts across multiple users within a household. Our Connected Fitness Subscribers can enjoy our classes anywhere through Peloton Digital, which is available through iOS and Android mobile devices, as well as most tablets and computers. We also have Digital Subscribers who pay $19.49 per month for access our content library on their own devices.

They are burning cash (growth I assume?), net losses are massive too:

…while sitting one a lot of marketable securities (less liquid than cash) which they added out of the blue in the fiscal year ending 30 June:

As of June 30, 2019, we had cash and cash equivalents of $162.1 million and marketable securities of $216.0 million.

…does anyone know why they spent a quarter a billion dollars on some relatively liquid investment positions all of a sudden? I’m not a CFO:


P.S. If you read this Peloton Tread (treadmill) review by DC Rainmaker, who specialises in all things for “swimming, biking and running”, you’ll understand that software can make it or break it for a tech company. He’s written some brutal stuff about his Garmin’s software, despite using Garmin hardware for years (Garmin is a listed company and I also despise its software and adore its mutlisport watches):

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After a bit of research today, my other 2 cents:

As Buffett would say, invest in businesses, not stocks… or something along those lines. So he bought Coca-Cola, not Pepsi, and is still holding it. He got into cloud, but picked IBM… and sold it.

Peloton is a hardware and software company. Your hardware can get commoditised (especially by :cn: companies) once someone can smell the money. Your software can get replicated. What are the barriers of entry to making fitness bikes or creating fitness content and streaming in online? Ask Disney and Netflix.

Let’s look at the pricing (by the Wirecutter) and direct competition:

Pretty much everyone who tries the Peloton likes it, at least on a test run. Peloton’s customer reviews average 4.8 out of five, across more than 1,000 reviewers.

The Peloton indoor bicycle, with its live-streaming and on-demand classes, costs roughly $3,000 for the first year and nearly $500 each year thereafter.

(Peloton said in the S-1 that its main customer earns under $75k :thinking:)
(Source - Wirecutter https://thewirecutter.com/reviews/peloton-review-what-to-know-before-you-buy/#flaws-and-potential-dealbreakers)

There used to be a great hardware company called GOPRO. They are technically up for sale. Excellent innovative product at the time. After the IPO, they tried becoming a platform-based company with its own “YouTube”—and thus follow the machine-platform-crowd business model of successful tech companies, but failed, ultimately. I still own a GOPRO camera—but you, on average, only need to buy 1 camera:

So, technically, you buy a bike—a many have and are still using it—then pay for a subscription (or not). You don’t buy a new Peloton bike every 12 months or 24, when your contract runs out, or 33—the average replacement cycle for smartphones in the US.

Does Peloton sell differentiable products? Some people drive a Vauxhall, some—a Mercedes or a Tesla. A car can be not just a machine for movement, but also:

…a complex symbol denoting status, taste, rank, achievement, aspiration, and (these days) being “smart”—that is, buying fuel economy rather than display. But the customer buys even more than these attributes. The enormous efforts of the auto manufacturers to cut the time between placement and delivery of an order and to select, train, supervise, and motivate their dealerships suggest that these too are integral parts of the products people buy and are therefore ways by which products may be differentiated.

(unless you’re ordering a kitchen appliance from Currys PC World…
Source - Harvard Business Review)

That means they have to convince people to choose Pelotons and make them fork out $2.2k (or $4k). Then we should sign up to the app.

Does this justify the hefty Sales and Marketing spending Peloton undertakes every year? Possibly:

So, can Peloton become the iPhone of stationary bikes and treadmills among the “Androids”? It has a machine (not the bikes/treadmills but the data from all users), a platform (paid classes), a crowd (can you do “multiplayer”? they have a leaderboard… a bit like “Strava”):

A differentiated product doesn’t need to be a better product, it just needs to be perceived as a better product by the buyer. Much of the advertising and promotion that occurs in our society – of which there is plenty – is focused on trying to convince consumers that their product is better than those of competitors. Whether it is actually better is immaterial. The only thing that counts is if you can convince the consumer that it is better.

(Source - Iowa State University analysis)

Competition

  1. Flywheel’s FLY Anywhere (launched 2017)

Have you heard of Flywheel?

Peloton filed suit against Flywheel, claiming Flywheel infringed upon Peloton’s patents, “by creating a copycat of the Peloton Bike experience called the “FLY Anywhere” that, among other things, detects, synchronizes and compares the ride metrics of remote users on a graphical user interface,” according to the suit filed in United States District Court for the Eastern District of Texas Marshall Division.

(CNBC - https://www.cnbc.com/2018/09/13/peloton-ceo-said-he-wasnt-worried-about-flywheel-now-hes-suing-them.html)

FLY Anywhere is cheaper at $1,699, while the subscription is $39/month:

Here it is next to Peloton Bike - from Wirecutter:
image

(Source - https://thewirecutter.com/reviews/peloton-review-what-to-know-before-you-buy/#flaws-and-potential-dealbreakers)

No wonder there’s this lawsuit.

  1. Echelon Smart Connect EX5s:


Source - https://flexmastergeneral.com

  1. TechnoGym (!) Bike Personal

Bike Personal is a “great” name, like FLY Anywhere… very catchy and googleable :eyes:


TechnoGym are the Samsung of fitness hardware https://www.technogym.com/gb/bike-personal.html

  1. Any other stationary bike that can connect via Bluetooth / ANT+.

  2. Bike trainers if you’re a cyclists - made by Wahoo, Tacx, etc etc.

Some can be much cheaper (minus the bike) and have apps, connectivity.



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By the way - this was on Kickstarter:
image
And this is now:

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Love your post (and others on other threads). Keep up the good work

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L Catterton, the largestretail-consumer focused private-equity firm in the world has a stake in Equinox, Peloton, Pure Barre, and ClassPass, among others - and the goal for many of these firms is to drive rapid growth and propel the company toward an IPO.

(Business Insider)

Jason Kelly, author of Sweat Equity: Inside the New Economy of Mind and Body (2016, Bloomberg Press/Wiley) - about the economics of the fitness world … he wrote it before the Peloton “hype” reached a new level:

“They have managed to use technology to create a sense of community so people feel like they are part of something, they get both the convenience and the social aspect,” Kelly said.

“I don’t think in five years from now, you and I would be talking and saying: ‘You know what’s great?
Smoking or being morbidly obese,’” he said. “There is a segment of the population that is going to continue to pay to have that in-studio experience, but what I think you may see less of are the very specific modalities where it’s something that could fade in and out of popularity.”

What we are seeing now is just a rationalization, he said. “It just got so big so fast.”

(Business Insider)

His other book - The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything - is about private equity. I read it ages ago and can recommend it if you want to understand PE better, though there should be more case studies of private equity small and big failures like Toys’R’US (owned by Bain, KKR, Vornado funds) , etc.

About Sweat Equity - from Amazon’s description:

… Through conversations with businesspeople, many driven by their own fitness obsessions, and first-hand accounts of the sports themselves, Kelly delves into how the movement is taking shape.

  • Understand the social science, physics, and economics of our desire to pursue activities like endurance sports and yoga
  • Get to know the endurance business’s target demographics
  • Learn how distance running—once a fringe hobby—became a multibillion dollar enterprise fueled by private equity
  • Understand how different generations pursue fitness and how fast-growing companies sell to them

I might get this book partly to understand why I spent so much money and time destroying my body training for triathlons (the World Triathlon Corporation - Ironman events’ owner - was acquired for $ 650 million…)

Not sure about the stock but loving the great examples of how to evaluate a business.

Thank you!

Is this going to definitely list? Im keen to see what happens…uber and lyft have been poor. Does anyone think this will be the same?

Seems like they have a moat!

I don’t think it’s a moat. It doesn’t meet the definition of a moat. No competitive/cost advantage vs competition - this has been covered in this thread. There may be a network effect via its leaderboards.

Yes, it looks like it may list:

Peloton Interactive Inc. is planning to start its initial public offering roadshow this week in what could be one of the largest debuts of the year, according to people familiar with the matter.

(Source - Bloomberg)

Peloton to price between $26 and $29 a share.

P.S. Isn’t investing in anything better than in We Co.?

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Barriers to entry are incredibly low, since basically anything that can raise customers’ pulses is a potential substitute.

:face_with_raised_eyebrow:

Might be an unpopular opinion - from Reuters BreakingViews:

The result has been a surge in sales of gear and more encouragingly, in subscription revenue – which is easier in theory for investors to predict. Both more than doubled in the year ending June 30, resulting in revenue of $915 million. Yet operational losses rose fourfold over the same period, to $202 million.

Justifying an $8 billion valuation is a strenuous feat. Peloton would have to continue to remain popular for years, selling more equipment while retaining customer loyalty. The history of fitness-related companies shows how difficult that is – Fitbit, Nautilus and Under Armour have all performed poorly as listed companies. Barriers to entry are incredibly low, since basically anything that can raise customers’ pulses is a potential substitute. Meanwhile, Peloton just shifted its subscription model from annual to monthly, which may have attracted new users, but also makes it easier for them to drop off.

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