I wouldn't buy Peloton. The need is dissipating as in-person restrictions ease at gyms. Competition is growing stronger in the home through virtual training. They had to reduce price in the face of competition. That hasn't paid off. Their earnings report showed much of that.
The stuff you mentioned are all knowns and the reason why PTON stock got crushed and down almost 70% from its high. I'm not interested in the knowns. What I'm interested in and trying to figure out is if this is a temporary hiccup which many young growth companies experience and go through. Or is Peloton a busted growth story that will never return to its glory days?
Investing is about looking forward and trying to figure out where the world and the company will be 5-10 years down the line. That's what makes investing hard and separates people who outperform against people who struggle. You have to skate to where the puck is going and not where it is now. I look at Peloton and think they can bounce back because I think this is temporary hiccup that can and will be fixed. I'm going to give the management the benefit of doubt and bet they can fix the problem.
Even after this spanking, PTON is still not cheap at around $16 billion market cap. But that's sure better than $45 billion or so it was trading at beginning of the year. You're always going to pay a premium for category leader. And Peloton is category leader in the emerging digital connected fitness space.
When I evaluate a company, I try to look at their total addressable market. Peloton thinks they can eventually sell about 20 million exercise equipment to 15 million household worldwide. They've sold little over 2 million so far. So if I do some back of the napkin quick math, I can come up with some valuation models. The real value of Peloton is in their digital subscription which they charge $40 /month and that's recurring revenue even after the sale of the equipment. They also charge like $13 /month for digital subscription access to people who don't own Peloton equipment but want access their online classes and digital resources. This is my area of focus. Peloton currently has over 2 million digital connected subscriptions. And the churn rate is remarkably low. It's less than
1%. That's absolutely amazing and tells me people really love their Peloton equipment and digital subscription. If the churn rate was like 10-20%, I would be more concerned about their future growth and future earnings potential. But with churn rate less than 1%, I'm pretty confident Peloton can keep growing once they fix their current issues.
Let's say Peloton can sell 10 million bikes and treadmills and get to 10 million monthly subscriptions. At $40 /month, that's $400 million revenue a month just from digital subscriptions and $4 billion a year. Digital subscriptions are high margin and almost pure profit. If we assign 20 multiple on that $4 billion, that's $80 billion market cap. Give it 40 multiple and that's $160 billion valuation. And that's at 10 million subscriptions. Peloton thinks they will eventually get to 20 million worldwide subscriptions.
At $160 billion valuation, that's 10x from today's current market cap and price. At $80 billion, that's 5x from today's price. I will be ok with 5X my money in 5-10 years. 10X or more would be even better. The potential is there for Peloton. The question is can the management execute. As I mentioned in the initial post, Peloton is currently only sold in 4 countries: US, Canada, UK, and Germany. So they have lot of countries and market they can tap into for future growth. I just came back from trip to Korea and I can tell you Peloton would sell well in Korea. Personal fitness is becoming huge in Korea. I look at digital connected fitness market and think we're in the infancy and Peloton can grow with it in North America, Europe, and Asia.
Anyways, that's my quick analysis why I decided to buy PTON shares yesterday. I was initial Peloton skeptic but have been warming up to the company after visiting their showroom and running some numbers. Not investing advice but sharing some of my thought process.