Author Topic: PTON - Peloton  (Read 63845 times)

KJP

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Re: PTON - Peloton
« Reply #240 on: February 15, 2021, 10:39:19 AM »
Not bashing it. But was there any post on this that looked like an investment analysis? Off balance sheet - the brand and community is a valuable asset. Not sure how that translates into a great business. It maybe similar to gymshark - where itís a clothing store worth $1B in 10 years.

Think thereís easier ways to make money. Congrats to the longs, hope the investment continues to pay dividends.

I keep seeing how it must be a fad because everything else in the exercise space has been a fad in the past...nothing specific to the company or the product though. That's not analysis, that's lazy.


Over a million connected subscribers and rapidly growing (as are workouts per mo per subscription), $1.5B net cash on the balance sheet, $500M FCF TTM, & they are buying Precor, struggling to meet demand...so what's your bearish price target based on all this?

What happens to capacity levels once they meet this literally once-in-a-hundred year demand due to a pandemic coupled with massive fiscal stimulus that gives people the $ to pay for the product?

Reasonable people can come to different conclusions on these things, and you add ZERO to the discussion by regurgitating the company's press release. Color me skeptical that the TTM FCF or Forward FCF estimates are levels from which Peloton can grow from once they meet this demand.

Yes of course, itís all pandemic induced! And all those upper middle class types who are buying this must be eligible for stim checks!

Apparently Iím ďrepeating press releasesĒ by quoting figures from the financial statements and actual subscriber counts...lol...

And what are you adding exactly? Whatís your valuation number?

No horse in this race, but I'll take a shot at valuation. As you mentioned, let's use $500.0m as our starting point for distributable cash flow. Well, assuming they didn't want to grow anymore, they would distribute all of that annually. I would probably be willing to pay $5.0 billion or so for that cash flow stream. Obviously, the play here is to grow the business and the brand, so we won't be seeing any dividends for a long time. Taking a look at the current cost of $45.0 billion, we clearly have quite a bit of growing to do before we get any reasonable rate of return on our investment in terms of actual cash distributions.

The two key questions here are when are we going to get the distributions and how much will they be? Assuming we got them today, I would be wiling to pay $45.0 billion for $4.5 billion of cash distributions every year. For every year we wait, that $4.5 billion of annual cash distributions needs to grow by 10% to compensate for my capital being tied up. Assuming we wait 15 years, that means PTON will need to be distributing ~$19.0b annually to investors.

What does $19.0b imply in terms of customers? Well, for simplicity, lets just assume no prices increases and no new products. Obviously this isn't reality and if you can fill in the numbers with realistic assumptions feel free to do so, I'm just giving a simple example. Each subscriber earns PTON $550 annually ($550m FCF / 1.0m subscribers). That means PTON will need to have ~35.0 million customers in 15 years time.

There are about 140m homes in the United States, and 50% of these are earning less than $75,000. That means there are probably 70 million homes that could even come close to affording an annual subscription to PTON. 50% of those homes will need to have a Peloton in 15 years time to make the valuation work. Keep in mind, this is for a 10% rate of return and ZERO margin of safety...

Note: I haven't looked into PTON at all. This was pulled together very quickly and I'm using simple estimates. Feel free to critique as needed, I just wanted to provide some numbers for the discussion.

I did a similar back-of-the-envelope exercise several months ago on this thread when the stock was much cheaper:  https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/peloton/msg413661/#msg413661

I also have no stake in Peloton either way, so I just do this stuff as a mental exercise.  I have a few questions about your quick overview:

1) Why is the TAM only the US?  It seems to me that a connected bike might sell anywhere in the world.

2)  Can your FCF/sub be right?  550/12 = $45/month at 100% FCF margin.  But a full membership is only $40/month and there are COGS and OpEx associated with them.  Does your $550 annual number include some FCF associated with equipment sales?  If so, I believe that FCF line item would scale down as a percentage of the business as a greater and greater percentage of subs come from the existing installed base rather than new purchases (if that's not happening, then the business likely has a big churn problem).  On the other hand, FCF margins are the subscription ought to rise over time with scale.

3)  I suspect that the current valuation includes significant option value for potentially large ancillary business lines like apparel, energy drinks, etc.  I have no idea how to value those options.
« Last Edit: February 15, 2021, 10:41:23 AM by KJP »


Dalal.Holdings

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Re: PTON - Peloton
« Reply #241 on: February 15, 2021, 10:53:27 AM »
My question to those who consider this a fad: "what would prove to you it's not a fad?"

Whether something is a fad or not is not provable either way at the moment. The only way we can find out is in the future if it sticks around or not.

Hence the need to speculate on investments like this. At best you could estimate the probabilities of PTON sticking vs. becoming a fad and apply them to your valuations accordingly.

The company is about 9 years old. There are big companies who have indicated they want to enter the space (AAPL). How much time do you need until you can figure out whether this is a fad or not?

Yes, you need to do a probabilistic assessment, not just say "Lol, it's obviously a fad". My p(fad) is low and getting lower as time goes on.
« Last Edit: February 15, 2021, 10:56:00 AM by Dalal.Holdings »

Dalal.Holdings

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Re: PTON - Peloton
« Reply #242 on: February 15, 2021, 10:58:55 AM »

I did a similar back-of-the-envelope exercise several months ago on this thread when the stock was much cheaper:  https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/peloton/msg413661/#msg413661

I also have no stake in Peloton either way, so I just do this stuff as a mental exercise.  I have a few questions about your quick overview:

1) Why is the TAM only the US?  It seems to me that a connected bike might sell anywhere in the world.

2)  Can your FCF/sub be right?  550/12 = $45/month at 100% FCF margin.  But a full membership is only $40/month and there are COGS and OpEx associated with them.  Does your $550 annual number include some FCF associated with equipment sales?  If so, I believe that FCF line item would scale down as a percentage of the business as a greater and greater percentage of subs come from the existing installed base rather than new purchases (if that's not happening, then the business likely has a big churn problem).  On the other hand, FCF margins are the subscription ought to rise over time with scale.

3)  I suspect that the current valuation includes significant option value for potentially large ancillary business lines like apparel, energy drinks, etc.  I have no idea how to value those options.

You make some good points. To limit the TAM just to U.S. households is extremely narrow minded. For one, the Precor acquisition will open to PTON being able to install their software on existing commercial equipment throughout the world (existing gyms, hotels, etc)...

They are already doing well internationally in a few select countries. Apparel is a call option

Broeb22

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Re: PTON - Peloton
« Reply #243 on: February 15, 2021, 11:03:20 AM »
75% of all the revenue PTON has ever generated has occurred in the last 2 years, and the percent is 90% for the last 3 years. Maybe it could still be a fad after all.

Dalal.Holdings

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Re: PTON - Peloton
« Reply #244 on: February 15, 2021, 03:38:54 PM »
75% of all the revenue PTON has ever generated has occurred in the last 2 years, and the percent is 90% for the last 3 years. Maybe it could still be a fad after all.

When a company is growing revenue 100% per year, the most recent years will have a majority of the revenue. And only one of those years had the pandemic, so there's that.

If in years 1, 2, 3, 4, 5 I make $2, $4, $8, $16, $32, the majority of my revenue will have occurred in the latter years...

I wouldn't spin 100% revenue growth into a weakness though--in fact, that would perk up my attention, but that's me.
« Last Edit: February 15, 2021, 03:40:28 PM by Dalal.Holdings »

widenthemoat

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Re: PTON - Peloton
« Reply #245 on: February 15, 2021, 03:53:53 PM »
Not bashing it. But was there any post on this that looked like an investment analysis? Off balance sheet - the brand and community is a valuable asset. Not sure how that translates into a great business. It maybe similar to gymshark - where itís a clothing store worth $1B in 10 years.

Think thereís easier ways to make money. Congrats to the longs, hope the investment continues to pay dividends.

I keep seeing how it must be a fad because everything else in the exercise space has been a fad in the past...nothing specific to the company or the product though. That's not analysis, that's lazy.


Over a million connected subscribers and rapidly growing (as are workouts per mo per subscription), $1.5B net cash on the balance sheet, $500M FCF TTM, & they are buying Precor, struggling to meet demand...so what's your bearish price target based on all this?

What happens to capacity levels once they meet this literally once-in-a-hundred year demand due to a pandemic coupled with massive fiscal stimulus that gives people the $ to pay for the product?

Reasonable people can come to different conclusions on these things, and you add ZERO to the discussion by regurgitating the company's press release. Color me skeptical that the TTM FCF or Forward FCF estimates are levels from which Peloton can grow from once they meet this demand.

Yes of course, itís all pandemic induced! And all those upper middle class types who are buying this must be eligible for stim checks!

Apparently Iím ďrepeating press releasesĒ by quoting figures from the financial statements and actual subscriber counts...lol...

And what are you adding exactly? Whatís your valuation number?

No horse in this race, but I'll take a shot at valuation. As you mentioned, let's use $500.0m as our starting point for distributable cash flow. Well, assuming they didn't want to grow anymore, they would distribute all of that annually. I would probably be willing to pay $5.0 billion or so for that cash flow stream. Obviously, the play here is to grow the business and the brand, so we won't be seeing any dividends for a long time. Taking a look at the current cost of $45.0 billion, we clearly have quite a bit of growing to do before we get any reasonable rate of return on our investment in terms of actual cash distributions.

The two key questions here are when are we going to get the distributions and how much will they be? Assuming we got them today, I would be wiling to pay $45.0 billion for $4.5 billion of cash distributions every year. For every year we wait, that $4.5 billion of annual cash distributions needs to grow by 10% to compensate for my capital being tied up. Assuming we wait 15 years, that means PTON will need to be distributing ~$19.0b annually to investors.

What does $19.0b imply in terms of customers? Well, for simplicity, lets just assume no prices increases and no new products. Obviously this isn't reality and if you can fill in the numbers with realistic assumptions feel free to do so, I'm just giving a simple example. Each subscriber earns PTON $550 annually ($550m FCF / 1.0m subscribers). That means PTON will need to have ~35.0 million customers in 15 years time.

There are about 140m homes in the United States, and 50% of these are earning less than $75,000. That means there are probably 70 million homes that could even come close to affording an annual subscription to PTON. 50% of those homes will need to have a Peloton in 15 years time to make the valuation work. Keep in mind, this is for a 10% rate of return and ZERO margin of safety...

Note: I haven't looked into PTON at all. This was pulled together very quickly and I'm using simple estimates. Feel free to critique as needed, I just wanted to provide some numbers for the discussion.

I did a similar back-of-the-envelope exercise several months ago on this thread when the stock was much cheaper:  https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/peloton/msg413661/#msg413661

I also have no stake in Peloton either way, so I just do this stuff as a mental exercise.  I have a few questions about your quick overview:

1) Why is the TAM only the US?  It seems to me that a connected bike might sell anywhere in the world.

2)  Can your FCF/sub be right?  550/12 = $45/month at 100% FCF margin.  But a full membership is only $40/month and there are COGS and OpEx associated with them.  Does your $550 annual number include some FCF associated with equipment sales?  If so, I believe that FCF line item would scale down as a percentage of the business as a greater and greater percentage of subs come from the existing installed base rather than new purchases (if that's not happening, then the business likely has a big churn problem).  On the other hand, FCF margins are the subscription ought to rise over time with scale.

3)  I suspect that the current valuation includes significant option value for potentially large ancillary business lines like apparel, energy drinks, etc.  I have no idea how to value those options.

Lol, great minds think alike. I think your assumptions are probably more accurate, I didn't spend much time on mine. I just wanted to put together some actual numbers instead of talking about brands. I don't care how strong the brand is if it doesn't make any money. Auto makers have very strong brands in my opinion, but the businesses are crap. There is a difference. Either way, the argument to buy needs to arrange these variables in a certain way, figure out how much cash the company will disgorge, and then have a huge margin of safety on top of that. So basically whatever value we come up with using these variables, we should only be willing to pay half of that. That is a very tall order in my book.

Broeb22

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Re: PTON - Peloton
« Reply #246 on: February 28, 2021, 09:52:18 AM »
Steven Wood bullishly writing about a stock continues to be a reliable bearish indicator.

Damn, was it higher interest rates, or was it reopening parts of NYC, or some other impossible to foresee catalyst that took this from the $160s to $120?

Dalal.Holdings

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Re: PTON - Peloton
« Reply #247 on: March 01, 2021, 01:47:45 PM »
Steven Wood bullishly writing about a stock continues to be a reliable bearish indicator.

Damn, was it higher interest rates, or was it reopening parts of NYC, or some other impossible to foresee catalyst that took this from the $160s to $120?

So, to summarize:

Price goes to $25 to $160s: "Price is irrelevant, fundamentals are what matter"

Price goes from $160s to $120: "Lol, this was so predictable"