Peloton Investment Memo – 6.16.20

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Peloton Investment Memo - 6.16.20


  1. As someone who is very into fitness and investing, I’ve been wondering about $PTON for a while.

    As Justin (the Pelonton consumer) has said in the past, most Peloton bikes become clothes hangers and collect dust after the first couple of months. That being said, unlike a traditional treadmill, Peloton thrives on the monthly/annual subscription model, where the pitch presentation states that the subscriber churn rate is low. I’ve often thought about monthly subscriber business models such as Netflix, Amazon Prime, Audible, etc. An interesting consumer behavior that I have observed is that consumers do not tend to subscribe/unsubscribe to the service throughout the course of the year, they just stay subscribed throughout, regardless of product usage. It’s funny, for products like Netflix, one could easily subscribe for a month to watch Stranger Things, for example, and then when the season is over, they could unsubscribe and wait for the subsequent season, saving themselves months’ worth of fees. They could then subscribe to Disney+ for a month, and binge The Mandalorian, unsubscribe from D+, and go watch The Handmaids Tale on Amazon Prime. However, people don’t do that. They just continue paying the monthly subscription, often subscribing to multiple platforms at once. Along that same vein, I wonder if the Peloton low subscriber churn rate is due to this behavior, and not due to consumer brand loyalty or sustained product usage.

    In addition, I think there are two more factors at play here that contribute to the low churn rate: one financial, and one behavioral:

    1) Is it possible that someone who spends $2,245 on a bike, $120 on shoes, and let’s say that 50% buy the optional accessories (mat, monitor, weights) for an average total of $75 (grand total purchase of ~$2,500) is not bothered by a $40/month subscription, and therefore is not eager to cancel when they stop using the product? Perhaps they associate the monthly cost with the fact sunk cost of owning a physical/tangible bike in their house, and therefore they keep both?

    2) I also believe there is consumer behavior in which people don’t tend to cancel their gym memberships (and likely their Peloton subscriptions) because in doing so, they are expressly admitting that they are quitting/giving up on routine physical exercise. Now, I don’t have a study or figures to back up this claim, as it is purely anecdotal, but I think people are reluctant to cancel their gym memberships because there is often this thought of “I’ll go back to the gym soon” (whether it actually happens, or not). For this reason, I believe the churn rate is low, as unsubscribing is an admission of not using the product.

    I believe this claim is also backed up by the chart on slide 4 of the the pitch presentation, which displays the average monthly workouts per connected fitness subscriber by cohort (subscriber year). The way I view this chart is to say that Peloton users decrease their average monthly workouts (AMW) by 25% in the first year (the difference between 13.7 AMW for subscribers that joined in 2019 and 10.4 AMW for subscribers that joined in 2018). Between years 2 and 3, they see an 11% decrease in AMW (10.4 down to 9.3). After year three, AMW sees another 10% decrease (9.3 down to 8.4). This signals that Peloton users do 40% fewer workouts each month in year four than they did the year they purchased the bike. This seems pretty significant, and therefore I’m not sure if the chart Justin uses actually supports low subscriber churn nor great subscriber engagement, but rather, a consumer base that gets tired of the product.

    From cash flow model basis, Justin has done some really great work here. I don’t have any comments on the valuation, but would like to update the key figure here: The Stock Price (as of July 10, 2020) is $64.54, which is a 37% increase since the June 12th price Justin used in the model/pitch. This would mainly just impact the percentages of risk/reward in reaching the upside/base/downside cases. Justin states that there is 40% upside from the June price, but seeing that we have since observed +37% growth, how much more room does it have to run?

    Really appreciate the work here!