đ´ââď¸The Rise of Home Fitness: Peloton Files its S-1 (Long Twitter Fodder)đ´ââď¸
In case you havenât heard, Peloton Inc. filed its S-1 earlier this week. An S-1 is like a bankruptcy First Day Declaration. Itâs an opportunity to sell and control a narrative. In the case of the S-1, the filer wants to appeal to the markets, drum up FOMO, and maximize pricing for a public capital raise (here, $500mm). So, yeah, want to call yourself a technology / media / software / product / experience / fitness / design / retail / apparel / logistics company? Sure, go for it. In an age of WeWork, a la-dee-da-kibbutz-inspired-community-company-that-may-or-may-not-be-valued-like-a-tech-company-despite-being-a-real-estate-company, hell, anything is possible.
Frankly, weâre surprised Peloton didnât throw in that itâs a âCBD-infused-augmented-reality-company-that-transacts-in-Pelotoncoin-on-the-blockchain companyâ for good measure. Go big or go home, dudes! PETITION Note: the bankruptcy/First-Day-Declaration equivalent of this absurdity must be every sh*tty retailer on earth claiming to be an âiconicâ brand with loyal shoppers who, despite that loyalty, never spend a dollar at said retailers, all while some liquidators are preparing to sell them for parts:
But we digress.
For those who donât live in Los Angeles or New York and are therefore less likely to know what the hell Peloton is (despite its 74 retail showrooms in the US, Canada and UK and pervasive ad-spend), it is a home fitness company that sells super-expensive hardware ($2,245 for the flagship cycle and $4,295 for the treadmill)* and subscription-based fitness apps ($39/month). Itâs helped create the celebrity cycling trainer and aims to capture the aspirational fitness enthusiast. And, by the way, itâs a real company. Here are some numbers:
$196mm net loss (boom!) on $915mm of revenue in the fiscal year ended June 30, 2019 ((both figures up from 2018, which were $47.8mm and $435mmmm, respectively, meaning that the loss is over 4x greater (boom!!) while revenue grew by over 2x));
Hardware revenues increased over 100%, subscription grew over 100% and âotherâ revenue, i.e., apparel, grew over 100%;
511,202 subscribers in 2019, up from 245,667 in 2018;
577k products sold, with all but 13k in the US;
a TAM that, while not a ludicrous as WeWorkâs the-entire-planet-is-an-opportunity-pitch, is nonethelessâŚuhâŚaggressive with total capture at approximately 50% of ALL US HOUSEHOLDS
and;
$994mm VC raised, $4+b valuation;
A big part of that net loss is attributable to skyrocketing marketing spend. But, Ben Thompson highlights:
Peloton spends a lot on marketing â $324 million for 265,535 incremental Connected Fitness subscribers (a subscriber that owns a Peloton bike or treadmill), for an implied customer acquisition cost (CAC) of $1,220.18 â but that marketing spend is nearly made up by the incremental profit ($1,161.40) on a bike or treadmill. That means that subscription profits are just that: profits.
The company also claims very low churn** â 0.70%, 0.64%, and 0.65% in 2017, 2018 and 2019, respectively â though this thread âŹď¸ points out some obfuscation in the filing and questions the numbers (worth a click through):
Ben Thompson hits on churn too, noting that major company promotions havenât rolled off yet:
Only the 12 month prepaid plans have rolled off; the 24 and 39 month plans are still subscribers whether or not they are using their equipment (and given the 0% financing offer, I wouldnât be surprised if there were a lot of them).
Surely roadshow attendees will have questions on this point and then, market froth being market froth, totally disregard whatever the answers are. đ
The company also highlights some tailwinds: (a) an increasing focus on health and fitness, especially at the employer level given rising healthcare costs and a general desire to offset them;** (b) the rise of all-things-streaming; (c) the desire for community; and (d) significantly, the demand for convenience. We all work more, weather sucks, the kids wake up early, etc., etc.: itâs a lot easier to work out at home. This thread âŹď¸ sure captured it (click through, itâs hilarious):
Which is not to say that the company doesnât have its issues.*** It appears that like most other fitness products, thereâs seasonality. People buy Pelotons around the holidays, after making New Yearâs resolutions they undoubtedly wonât keep. There are also some lawsuits around music use. As we noted above, the marketing spend is through the roof ($324mm, more than double last year) and SG&A is also rising at a healthy clip. Many also question whether Pelotonâs cult-like status will fizzle like many of its fitness predecessors. And, of course, thereâs that cost. Lots or people â ourselves included â have questioned whether this business can survive a downturn.
Indeed, among a TON of risk factors, the company notes:
An economic downturn or economic uncertainty may adversely affect consumer discretionary spending and demand for our products and services.
Our products and services may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, and other factors, such as consumer confidence in future economic conditions, fears of recession, the availability and cost of consumer credit, levels of unemployment, and tax rates.
And:
To date, our business has operated almost exclusively in a relatively strong economic environment and, therefore, we cannot be sure the extent to which we may be affected by recessionary conditions. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products and services and consumer demand for our products and services may not grow as we expect. Our sensitivity to economic cycles and any related fluctuation in consumer demand for our products and services could have an adverse effect on our business, financial condition, and operating results. (emphasis added)
Now ainât that the truth. This will be an interesting one to watch play out.
*****
Questions about the companyâs stickiness in a downturn notwithstanding, we ought to take a second and admire what theyâve done here. Take a look âŹď¸
Sure, sure, itâs a ridiculous metric in an SEC filing butâŚbutâŚlook at the total number of workouts. Look at the average monthly. Unless Peloton is truly expanding the category, those workouts are coming out of someone elseâs revenue stream. Remember: SoulCycle did pull its own IPO some time ago.
In a recent piece about the rise of home fitness and the threat it poses to conventional gyms and studios, the Wall Street Journal noted:
U.S. gym membership hit an all-time high in 2018, but the rate of growth cooled to 2% after a 6% rise the year before, according to the International Health, Racquet & Sportsclub Association. Much of the decadeâs growth has been fueled by boutique studios like CrossFit, Orangetheory and SoulCycle, whose ability to turn fitness into a communal experience has sparked fierce loyalty to their brands. IHRSA says itâs too early to tell whether streaming classes will reduce club visits. CrossFit, SoulCycle and Orangetheory say they donât see at-home streaming fitness programs as a threat.
We find that incredibly hard to believe. Is there correlation between the slowdown and growth and Pelotonâs 128% and 108% growth from â17-â18-â19? Peloton may be more disruptive than the naysayers give it credit for.
Back to Ben Thompson:
Like everyone else, Peloton claims to be a tech company; the S-1 opens like this:
We believe physical activity is fundamental to a healthy and happy life. Our ambition is to empower people to improve their lives through fitness. We are a technology company that meshes the physical and digital worlds to create a completely new, immersive, and connected fitness experience.
I actually think that Peloton has a strong claim, particularly in the context of disruption. Clay Christensenâs Innovatorâs Dilemma states:
Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.
It may seem strange to call a Peloton cheap, but compared to Soul Cycle, which costs $34 a class, Peloton is not only cheap but it gets cheaper the more you use it, because its costs are fixed while its availability is only limited by the hours in the day. Sure, a monitor âunderperformsâ the feeling of being in the same room as an instructor and fellow cyclists, but being able to exercise in your home is massively more convenient, in addition to being cheaper.
Moreover, this advantage scales perfectly: one Peloton class can be accessed by any of its members, not only live but also on-demand. That means that Peloton is not only more convenient and cheaper than a spinning class, it also has a big advantage as far as variety goes.
The key breakthrough in all of these disruptive products is the digitization of something physical.
In the case of Peloton, they digitized both space and time: you donât need to go to a gym, and you donât have to follow a set schedule. Sure, the company does not sell software, nor does it have software margins, but then neither does Netflix. Both are, though, fundamentally enabled by technology.
If Thompson is right about that value proposition, is it possible that, in a downturn, Peloton can win? At $40/class, it would take 57 classes to break even on the hardware and then youâre getting a monthly subscription for the cost of one class. Will people come around to the value proposition because of the downturn?****đ¤
Before then, weâll find out whether the market values this company like a tech hardware company or a SaaS product. And the company can use the IPO proceeds to market, market, market and try and lock-in new customers before any downturn happens. Then weâll really test whether those churn numbers hold up.
*The company doesnât break out the success of the two other than to say that the majority of hardware revenue stems from the bike. We would reckon a guess that the treadmill is losing gobs of money.
**It stands to reason that the company would have strong retention rates given the high fixed/sunk cost nature of its product.
***One risk factor is curiously missing so we took the initiative to write it for them:
We sell big bulky products that appeal more to coastal elites.
Unfortunately, given the insanity if housing prices and spatial constraints, a lot of our potential customers in Los Angeles, San Francisco and New York simply may not have room for our sh*t.
****Unrelated but WeWorkâs Adam Neumann insists that WeWork presents an interesting value proposition in a downturn: viable office space without the long-term locked in capital commitment. Itâs not the craziest thing weâve heard the man say.
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