Peloton stock is being hammered. I see a buying opportunity
High growth. Recurring revenue. Low churn rate. And high quality products.
Key Business Stats (as of 11th May 2021) :
Market Cap : $26.098bn
Revenue (TTM) : $3.69bn
Gross Profit (TTM) : $1.487bn
YoY Revenue Growth : 100% since 2017. (I kid you not, this company is doubling every year since 2017)
YoY Gross Profit Growth : north of 100% EXCEPT for last 12 months which only saw a 77% increase. This is due to higher expedited shipping costs because of COVID-19 disrupting Peloton’s traditional supply chains
Churn Rate for Connected Fitness subscription : below 0.8%
Total Debt : $555m (yeah, it’s low)
Total Cash on Balance Sheet : $1.03bn (yeap, this business has a solid balance sheet)
Total liability from Tread+ recall (from latest earnings call) : $165m. 105m revenue impact (no sales from Tread+). Refunds of Tread+ expected at 50m. Tread connected fitness subscription waiver costs for 3 months will cost 10m.
Why I think Peloton is a buy today
Peloton stock is being hammered by the market. It peaked at $162.72 on Dec 21st 2020 before promptly selling off thanks to a mix of the uncertain interest rate environment / inflation / macro environment and the Tread+ treadmill recall.
At today’s price of $87.49, Peloton is trading at a 7x Revenue and 17x Gross Profit multiple. If growth holds into 2021, you’d be buying this company today at a value of 3x-4x Forward Revenue and 6x-8x Forward Gross Profit.
In my book, paying such a low multiple for a high growth business like Peloton is an almost no-brainer. It is a supremely high quality business that has a high chance of becoming much more valuable in 2030.
Customer reviews of Peloton’s Bike and Tread products are good. People who own the machines like them and continue paying that $39/month fee.
The company has figured out how to manufacture high quality products at scale. They've also doubled down on their manufacturing capabilities by acquiring Precor. Time will tell if Precor delivers on the promise of being able to manufacture Peloton’s products well.
A business that only sells high quality product almost never gets into my personal investment portfolio. However, Peloton has a Recurring Revenue Business linked to every hardware it sells. I’m a sucker for recurring revenue and Peloton brings that to the table.
Peloton’s Recurring Revenue Business
Peloton has a $39 / month Connected Fitness membership (requires hardware - bike and treadmill) and a $12.99 Digital Membership (just workouts).
The Digital Membership business is deliberately run at breakeven. It is an acquisition tool for the more expensive $39 Connected Fitness plan. And it is working. 20% of all Digital Membership subscribers upgrade to the $39/month plan and buy a bike or treadmill to go with it.
These customers also have a very low churn rate. 0.8% and less. I think once you’ve invested thousands of $$ into a bike or a treadmill, you’re committed to the Peloton ecosystem. If you do get rid of the bike, the next person who buys it off you will likely continue with the subscription. The hardware is not as great to use without the videos and workouts on Connected Fitness plans.
This. Is. An. Incredible. Business. Model.
And it shows in the growth numbers. As each subscriber matures, revenue from subscriptions will outpace the initial investment in each hardware. You should see this on the financial statements eventually and gross profit will continue climbing as a % of revenue.
This is not rocket science. If you believe this is possible, expect valuation to expand long term.
International Growth
Peloton is launching in Australia. Earmarked cities for the launch is Melbourne, Sydney and Brisbane (source : latest earnings call). Peloton will start by launching Digital Membership and following up with a roll out of Connected Fitness with the hardware.
3rd party logistics provider has already been located in all 3 cities.
My thesis for growth is : Can you see Peloton becoming a global brand like Netflix? If you can, then you are buying Peloton today at a great price.
It certainly won’t be as easy to roll out globally as Netflix, but if the business is able to gradually build its international business while continuing to post growth in the US, Canada and UK, the future is bright.
Risk & Reward
The risks are :
Higher than anticipated recall costs for Tread+
Damaged brand reputation from Tread+ causing customers to lose confidence in the brand
Growth slows dramatically from failed AU expansion and lack of market interest in UK & CA. Valuation nose dives as a result.
I think the current valuation already prices in this risk and represents a great buying opportunity.
I have skin in the game and made a purchase at $98 / share. I only bought 10 shares and am planning to average into this position.
I believe Peloton is worth a lot more in 2022 and even in 2030 as long as they keep executing. The way the business plans to manage Tread+ recall appears to be good with only a $165m hit to the bottom line. The business is sitting on $1bn of cash with an extra $555m of total debt. It can easily afford this.
This is a good balance sheet and derisks this investment for me.
It is certainly not a cheap company to own despite the recent sell-off, but I simply cannot ignore the growth this business is undergoing and the high quality nature of its products, balance sheet and financials.
**This is not investment advice and is merely opinion. I am not a certified financial analyst or hold any investment related qualifications. I’m just a guy who is investing for retirement. Do your own research before buying any stock recommended on this publication. I own shares in Peloton as of 11th May 2021.