Peloton Looks Like the Next Fitbit or GoPro

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“Above all else, we are an innovation company transforming the lives of people around the world through our ever-evolving fitness platform.”

Source: Sundry Photography / Shutterstock.com

That’s how one of the first lines reads in the U.S. Securities and Exchange Commission Form S-1 filing for freshly public fitness company Peloton (NASDAQ:PTON). I admire the vision. I applaud the ambition. But as an investor, I think I’ve seen this rodeo before — and it won’t end pretty for Peloton stock.

In the big picture, Peloton feels a lot like the next GoPro (NASDAQ:GPRO) or Fitbit (NYSE:FIT). It is an exceptionally niche consumer hardware business, trying really hard to build out an accompanying software business. But it won’t experience much success given the small addressable market and intense competition.

After all, when GoPro first went public, the company said it was “enabling the world to capture and share its passion,” indicating a pivot towards media. When Fitbit first went public, it said it was helping people “lead healthier, more active lives by empowering them with data, inspiration, and guidance to reach their goals,” indicating a shift towards data.

Neither company panned out as planned for various reasons — and those same reasons will likely stunt Peloton’s long-term growth, too.

To be sure, I think Peloton is a better version of both GoPro and Fitbit. But, it’s still just a niche hardware company that doesn’t deserve its current valuation, so let the buyer beware.

Peloton Isn’t All Bad

To start, I’d like to say that I do get the Peloton bull thesis.

You have a company that is revolutionizing the way people work out, making working out a connected, at-home experience in an era where the at-home economy is taking over and consumers are more concerned about their health and wellness than ever before. At the same time, Peloton doesn’t just sell fitness bikes and treads — it has built an ecosystem surrounding those bikes and treads, selling on-demand, subscription workout services to Peloton owners.

At scale, this software subscription business will be the big kahuna — not the hardware business — and that’s exciting from a margin profile and long-term profit growth perspective.

I get all that. But, here’s the thing.

At the end of the day, Peloton is an expensive fitness bike maker that slaps a TV on a bike and offers classes to its users. In this sense, Peloton looks a lot like GoPro and Fitbit 2.0.

Peloton Has GoPro and Fitbit Written All Over It

Time for a history lesson.

A few years back, GoPro was supposed to change the camera market. Everyone was supposed to buy a GoPro camera and record all their adventures. But, very few people did, because the market for recording adventure activities is very small, and because people can already do that without an action camera.

Same story with Fitbit. Everyone was supposed to buy a Fitbit tracker and record their steps and activity. But, very few people did, because the market for doing so isn’t all that big, and because people can already do that without a Fitbit tracker.

Let’s apply those lessons to Peloton.

Right now, the narrative is that everyone is going to buy a Peloton fitness bike or tread, and join the subscription ecosystem. But who is really going to do that? Very, very few people. The economics don’t make sense — at $40 per month, Peloton’s classes cost the same as an average gym membership, and that’s after you pay $2,500 or more for the bike. The fitness argument doesn’t make sense — it’s a bike, not an all-in-one fitness machine — nor does the social argument (the classes are digital) or the convenience argument (you need a big home with a big open space).

Long story short, very few people will buy Peloton bikes, because the market for expensive fitness bikes is very small, and because people can already get a great workout at their local gym.

The Addressable Market Is Small

Quite frankly, Peloton is a product for rich people who like to work out and also have big homes. That’s a very small portion of the population.

Sure, in the S-1 filing, Peloton says its total addressable market is 67 million households. But, if you read the fine-print, the income demographic for that addressable market is simply $50,000 and up. No one making $50,000 is going to pay $2,500 for a Peloton bike and then pay $40 a month to use it. Further, not many people who make $50,000 a year have a home big enough with enough open space to use a Peloton bike.

Instead, this is more likely a product which skews to the $150,000-and-up income demographic. How many people make that in America? About 6% of the population. How many people use treadmills and bikes in Peloton’s markets? About 100 million. Thus, Peloton’s addressable market is more like 6% of 100 million, or about 6 million.

Sure, Peloton could grow that number over the next few years thanks to its unique value prop. Still, the big idea here is that Peloton will never be that big at scale.

At Best, Peloton Stock Is Worth $7 Billion Today

At best, my numbers indicate that Peloton stock deserves a $7 billion valuation today — which means that even in a best case scenario, near-term upside from current levels is muted.

Here are the assumptions in my model:

  • Peloton grows its install base to 7 million bikes and treads by 2025, above my estimated 6 million addressable market and about half of Peloton’s stated serviceable addressable market of 14 million products.
  • Average sales prices on Peloton products go up as more consumers opt for the more expensive treads.
  • Over 90% of the install base subscribes to Peloton classes at roughly $40 per month.
  • Total revenues come to about $7.5 billion by fiscal year 2025, up from just shy of $1 billion in FY19.
  • Product gross margins push higher towards 45%, from the low 40% range today.
  • Subscription gross margins also push higher towards 50%, from the low 40% range today.
  • Total gross margins scale from the low 40’s to the mid-to-upper 40’s by FY25.
  • The operating expense rate normalizes down to about 35% by FY25, from almost 65% in FY19.
  • Net profits come to about $700 million by FY25.

Based on a market average 16-times forward multiple, that implies a FY24 valuation target for Peloton stock of about $11.2 billion. Discounted back by 10% per year, that comes to a FY19 valuation target of just under $7 billion.

Bottom Line on the Peloton IPO

I don’t think it’s all doom and gloom for Peloton stock. But, the current valuation is warranted only if everything goes right, and more likely than not, everything won’t go right. Instead, the most likely path forward is for this company to dominate the expensive at-home bike and tread market, monetize that niche with a cool subscription service, and then do very little thereafter.

Assuming so, growth will probably dramatically decelerate over the next few years, and PTON stock is not priced for dramatic growth deceleration. As such, I’d avoid Peloton stock for the time being.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/peloton-looks-like-the-next-fitbit-or-gopro/.

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