PTON opened Friday two weeks ago, with prices up 13%. Why? Since their IPO last year, their quarterly results showed a first time operating profit of $84.4m, which was better than expected. And their sales have exploded over the last three years, growing more than eight fold:
That’s quite noteworthy. But what is Peloton? Peloton is basically an interactive fitness platform. They make money by selling home exercise bikes - with 22 inch touch screens, add-on accessories, and an online subscription - to a growing community.
Example of a Peloton bike:
The subscriptions provide a steady stream of income, alongside the one-off equipment costs.
The subscription gives access to livestreamed group classes with real time interaction, leadership boards, and a way to have some friendly competition with your friends and family in the Peloton network.
A Growing Niche
We were already familiar with Peloton before we read the news about the company’s first quarter of profits. We had heard about the company through podcast adverts, and from their physical stores in London. Given our familiarity with the company we were interested in taking a closer look at it, through a value-investing lens. Since the COVID-19 pandemic took hold, home exercise equipment has risen in popularity. May 2020 estimates of the business indicated that online searches for “Peloton” had almost tripled since February. As a result the share price has increased a lot:
And to further leverage the popularity of the home exercise trend, they are launching the interactive Peloton treadmill - called “Tread” - at the end of the year.
There is clearly demand for home exercise equipment these days.
But given the popularity of the industry, what does the competitive landscape look like?
Peloton’s biggest competitor was another exercise bike subscription business called Flywheel. However, Peloton acquired them in February 2020.
There are other competitors, such as NordicTrack and Echelon, but they lack the same direct live element and online popularity.
Peloton is therefore the dominant player, which arguably gives the company a competitive moat (something value investors look for).
Despite the explosion in sales, and the dominant market position of the company, there is one aspect that makes us hesitant: the financials. Operationally, Peloton are still making losses on a year-on-year basis (2020: -4.4% operating margin).
However, as mentioned above, their FY2020 Q4 operations have yielded an operating profit of $84.4m. But despite the fact that the trend is going in the right direction, as value investors we are not yet comfortable with investing in the business. That’s because we prefer to see a longer track record of proven profits. A long track record shows us that the company is able to sustain their profits over the long term, which makes it more likely that they will be able to do so in the future. Whether Peloton’s quarterly profit is here to stay, or a COVID-19 boost, is yet to be seen. Moreover, when we value a company we use the historical financials as a basis to model the future financials, but that is very difficult to do for Peloton because the historical numbers are negative. For us to consider investing in Peloton the company would have to have a longer track record of profits.
Does our unwillingness to invest in Peloton mean that we believe the company is a bad investment? No, it doesn’t. It just means that Peloton currently does not meet the criteria of our investing framework. We’d prefer to wait a few more years to see if the company can produce a proven track record of returns, before we’d consider investing. But the business looks exciting, and we will keep an eye on future developments. Happy investing! Lars and Roshni