Tuesday we presented a new Black Book on best idea short Peloton. To access the slide deck and replay CLICK HERE. This is perhaps the biggest battleground retail stock today and one that could still move a lot in either direction.
If our research is right, we see over 50% downside in the stock from here.
Digital Only
We continue to think the underlying value of the Peloton digital-only offerings is minimal. Just this week Peloton changed from a 30day free trial to a 90day. Why would you do that now? This seems like the perfect time for people to trial for 30days then commit to paying if it is worth it. We suspect conversion on the 30day hasn’t been that strong.
At the same time the market seems to think that everyone doing social distancing will pick Peloton for home exercise, yet there are many free options and big competitors that are getting more serious on streaming fitness content. On a local level many gyms and clubs offering streaming options to customers while everyone is stuck at home. Planet fitness is even streaming live workouts each day on Facebook while its gyms are closed which are getting hundreds of thousands of views. Last week Apple was reported to be developing an app with on demand guided workouts, codenamed Seymour. The project is apparently being headed by fitness instructor Jay Blahnik. Amazon already has workout content on Prime, and it could step of the content production and marketing for this while selling fitness products around it.
Streaming fitness content today is a commodity. There is essentially no differentiation in the various product offerings. That means comparable content can be found on YouTube for free. This is why Peloton saw significantly stagnated growth in digital only subs in fiscal 1Q leading it to cut the price by 33%, start the original 30day free trial, and plug money into a new marketing campaign all in December. You have to believe in tens of millions of digital subscribers and hope pricing wont crash to want to get long PTON on the digital only opportunity. Given where we see the value proposition vs challenges from the competitive set, we just don’t see that happening.
Connected Fitness Cycling
We think there is viable business in connected cycling, but the TAM is too small for PTON to grow into this valuation, especially given how much competitors are rushing into the space.
With the shutting down of gyms interest in the product is higher, there's no doubt about that, but with the moves in the markets and shutdown of many businesses nationwide, cancellation risk is rising high as well.
Don’t forget that about half of the company's sales are financed through Affirm. With such unsecured loans in this uncertain economic environment, Affirm has to be significantly tightening lending standards. That means some pressure on the marginal consumer which should be already concerned about taking on the expense of a Peloton bike in this economic environment.
Lastly, as people who can afford the service shop around, if they are the type to be happy to spend up for a premium product, Peloton now has competition from perhaps the most recognizable name in high end fitness in Equinox/SoulCycle. This competitor unveiled its similarly priced, competing product a couple weeks back. We think that puts clear pressure on Peloton’s long term market share.
If PTON can capitalize on its connected fitness market opportunity, with think that is worth about $3bn today vs the current $7bn in market cap.
Noise on Near Term Numbers
With the 30 day trial starting in December and now a 90day trial starting in March for digital only (both are last month of the quarter) there will be some noise in the digital only numbers over the coming quarter or two. Management has kinda kicked that can down the road.
Then on bike sales and connected fitness subs, with this spike in interest near the Q end, bike delivery is 2-3 weeks in a normal situation, perhaps more with the US under ‘lockdown’. So bikes not might not arrive until 4Q and the bike also has a 30day trial. Connected fitness memberships don't become live until activated on the bike. So reconciling interest, delivery, trials, returns, activations, cancellations, etc. around quarter ends is going to be a little tricky for a couple quarters. But given what we think is priced into the stock here, any big slowdown (miss) in sub additions, or spike in churn would be very bad for the stock. With our view of the direction the US consumer heading is, despite the noise, both of those could happen in the next couple quarters.
