The Truth about Peloton Stock.

hey everyone meet kevin here is it time

to buy peloton well let's talk about

some pros and some big risk factors so

we have to address we're talking about

peloton and peloton stock obviously

palton crashed after their last earnings

peloton has been on a very very strong

downtrend and it has not been very good

for shareholders this is a company that

has previously ran well into the 100

plus range 130 plus range i mean this

was a darling of the pandemic and people

loved buying a peloton but when you look

at the day chart for peloton now it's

just not that great you saw that 171

peak over here in february and folks

since then it has been a bleed out

essentially for peloton we did hit a

temporary low over here in may but after

the last couple earnings we just went

down and down now i did sell out

completely of my peloton as of uh

somewhere around 113 is when i

completely sold out which remember any

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heavier on anyway yeah peloton i sold it

before the earnings uh the september

earnings cycle

and the reason i sold it then is because

i started noticing declining search

trends declining website traffic

and the nail in the coffin for me was

when peloton started reducing their

prices as well as at the same time their

delivery time frames were falling

while we were in a supply crisis or a

shipping crisis which is weird because

you would expect that shipment times

would go up

if there's a shipment crisis so the only

reason you would have shipping delays

but then actually see shipping time

frames go down for a new peloton bike is

if demand was substantially lower and

peloton was essentially trying to get

product out of inventory or off the

shelves so to speak and they weren't so

reliant on waiting for manufacturing so

these were really big red flags and

we've seen these red flags developing

really for many months now in fact if

you take a look at the google search

trends for peloton you've kind of been

seeing this downtrend virtually all year

and and so

if even if you had sold or even if you

had looked at some point here in the

summer you would have seen the declining

trend now we've kind of flattened out at

this relative strength around 30 to 38

here uh but obviously this is

substantially lower than where we were

if we go back

really i just want to see the last

couple of years here but i'm going to

zoom out

obviously the pandemic bump very

substantial this is 2019 over here

pandemic bump was a little bit right

around here is where he kind of had the

pandemic bump uh panda people really

wanting to work out as the pandemic

lasts longer so we've obviously come

down uh from the pandemic lows we're

still higher with a search interest of

about 24

than where we were previously with

search interest around 10 to 12. so

trends are certainly ups but the stock

price is also

way up now in fairness peloton did ipo

last year

but the stock price is

way way way way up from where it ipo

remember it ipo'd for right around 27

per share it did fall as low as 19 a

share during the pandemic which was

pretty crazy uh that we did fall so low

actually it was 17 and 70 cents uh is uh

hello it actually fell there for a brief

moment take a look at that uh but anyway

and it did ipo shortly before that

but what's really important now is

asking okay are we in a position now

where it makes sense to buy peloton

again or are there too many risks that

are still sort of written on the wall

that we need to be aware of and why is

the stock running so well today

well the stock's running today because

the company disclosed that it is selling

23.9 million shares which would usually

lead the share price to go down but it's

actually going up because a buyer was

already located these aren't 23.9

million shares that are being thrown

onto the market to essentially increase

supply and any time you increase supply

when demand remains constant price goes

down very simple pq this is what you

learn in uh econ 101.

now the shares were sold at 46

per share which was a little bit less

than where

the stock was this morning but it really

served to create kind of a floor for the

market and i believe that's why the

stock is rallying about 12 today you've

got the stock up 12 today to 53 dollars

and 20 cents it did have a low yesterday

of 46.70 and these shares were sold at

46. and i believe that this 46 dollar

purchase has really created a support

level for the stock and that's why we're

seeing this 12 bump today because folks

are thinking that okay that's it we're

not going any lower see yesterday when

we hit 46.70 i believe the market was

pricing in the risk that peloton stock

could fall even lower that it could fall

into the 30s and so you had a lot of

hold on sort of buying activity now that

you had a big buyer come in essentially

a billion dollars worth of shares being

bought it's like a billion point seven

uh but anyway billion

1.07 billion there we go that's the

correct number of how much money this

raises for peloton now you've

essentially created a at least a strong

support line here at 46 because that's

clearly where somebody was willing to

buy essentially a billion dollars worth

of peloton stock and i think that's why

peloton's running right now but what

we've got to know here is

what could peloton potentially do with

the money what pros are there with a

peloton and then what risk factors do we

want to pay attention to if we're going

to actually invest in the company so

pros peloton's going to be using this

money to expand their facilities and

maybe even use it for acquisitions now

peloton has already been planning

according to their latest quarterly

report they're already planning on

spending about 500 million dollars

on on new infrastructure for their

facilities uh developing probably their

pre-core partnership pre-core

partnership by the way really excited

about that remember their pre-core

partnership is uh not even so much a

partnership it's it's peloton full-on

bot pre-core they make a gym equipment

that you usually see at hotels or gyms

it's high quality gym equipment peloton

bought them for around 400 million

dollars i thought it was a steal and it

really lets peloton and get into so many

different verticals i mean think about

it they could get into the the

elliptical machines they can get into

rowing machines they can get into

strength training machines which which

strength training alone is such a huge

opportunity for peloton

to have connected fitness in strength

training instead of just yoga or or

biking or treadmill or whatever now

strength training that in my opinion is

a huge opportunity especially if you can

get machines in people's homes think

about like a connected fitness bowflex

or something like that at some point in

the future uh via peloton so a lot of

optimism for the pre-core partnership

the company did have about 600 million

dollars in cash they've got some extra

marketable securities as well but if

they're planning on spending 500 mil it

kind of makes sense they were going to

start blowing through cash pretty dang

quickly especially since their free cash

flow is negative because they just lost

over 370 million dollars in this last

quarter and that is not good so while

i'm very very optimistic about this

pre-core partnership i'm more concerned

about some of the other things and other

trends that are happening at peloton and

unfortunately for me those negatives

probably outweigh the benefit and the

potential of what this billion dollars

and

investment by peloton into their

facilities and manufacturing and maybe

even for acquisitions or or other

developments with pre-core could

actually bring to the stock and so this

is what we're gonna have to talk about

now and those are the cons okay uh

and it's also i suppose another pro

would also be that hey look we've got uh

a new year's resolution cycle coming up

that is often good for fitness companies

we also have

the hope that uh once we

fully get out of the pandemic and

any traders who are in the stock kind of

riding it as a trade stay-at-home trade

get out of it and we get to a more

neutral market that maybe we'll see less

volatility and less pain towards the

downside which could be good for the

stock but in the meantime you've got

some other bigger problems to worry

about than this going from

covid stay at home darling to not and

those begin with churn okay let's take a

look at their latest financial report

and we're going to get an update on

their turn numbers here so

if we go ahead and look at the churn

numbers we're going to see that as of

september 30th 2021 they had churn of

about 0.82 percent now you'll notice

that's higher than the 0.65 percent on a

monthly basis that they've had since

2020. uh and the reason uh this is a

little bit concerning to me is when you

divide these numbers by each other

you'll find out that this is an increase

in the churn rate of about 26

now churn is still relatively low you'd

have to compound 0.82 percent but were

to really get a figure in terms of how

many customers you might lose uh

annually so but if we do just a rough

approximation here you're somewhere

around nine to ten percent of customers

that you're losing

on uh on an annual basis and this is

probably expected for

uh

you know the connected fitness world

uh somewhere around a 10 annual churn

but

the problem here is peloton used to

cheer itself on its extremely low term

and to see churn all of a sudden

increase 26

in my opinion is a little bit

problematic especially since we're also

going into sort of this new reopened

world

the last thing we want to see is all of

a sudden churn adjust to very high

levels or higher levels than where they

previously were and not actually come

back down so i don't like this

transition in churn

26 is definitely a lot of an increase

for a churn

in addition to that we've uh we've got a

few other things

so in my opinion create a few little

problems uh declining workouts and

advertising efficacy let's talk about

both of those so declining workouts i

thought this was interesting now this

could just be a representation of less

people being

home as much

but in 2020

you had 77 million workouts which worked

out which came out to or calculated it

out to about 58.3 workouts per user

which i actually thought was a lot when

i when i first saw about i noticed that

i see it's average uh

that's not the average monthly workouts

rather this is the total workouts in

millions right so you get 77 million

workouts divided by 1.3 million people

is how you get to about 58.3 workouts so

that's about an average of what a little

over one a week right well that average

has declined about 17

again this could be because people are

going back to work and they're not at

home

they're not home as much but it's it's

still a metric to pay attention to

and so we'll notice here that in

addition to this churn increasing we're

now seeing workouts at about 48.3 per

connected fitness account

as opposed to that 58.3 we previously

had so 17 decline in workouts uh and on

top of that we're noticing some pain in

advertising efficiency and this makes me

particularly concerned now one of the

reasons that was talked about in the

earnings call

was that the apple transparency upgrade

where apple has made it more difficult

for

advertising companies to target their

customers thanks to new new privacy

rules in the or on apple devices

so in a quarter two of the 2021 calendar

year peloton had 655.3

million in connected fitness product

revenue

655.3 right but in the very next quarter

we fell to

501. that's pretty dang low that's not

good that's a big decline that's a big

decline quarter over quarter and it's a

decline year over year so both ways you

slice it you see that connected fitness

product revenue going down which is a

sign that the advertising efficacy is

declining but not only can we see that

advertising efficacy must be declining

because all of a sudden product revenue

is going down advertising costs are

actually going up which reiterates that

advertising efficacy is going down see

in 2020 we spent 108 million dollars

on sales and marketing i'm sorry sales

and marketing was 114 divided by 601

that works out to about 19

in terms of how much they spend on

marketing compared to the revenue they

got from their connected fitness

products so for every doll for every

hundred dollars of product revenue that

they made they spent 19 on advertising

well for every 100

that were spent on products at peloton

in 2021 we now spent 56

dollars

on ads

that's huge spending 56 dollars per 100

on ads compared to the 19 you used to

spend it used to be

uh you used to have effective

advertising now you don't whether it's

blaming apple or it's because consumers

are saturated or because people feel

like like they're aware of peloton the

people who wanted it got it the people

who don't want it aren't getting it and

the ads aren't convincing them

whether it's because peloton believes

that their product is branded maybe too

much as a luxury product which is

something that they they mention see

right here top line the perception that

peloton is a luxury item we intend to

amplify the platform's value proposition

and really they're trying to attract

younger people with potentially less net

worth to try to get into the peloton

network

but so far their advertising is failing

now you might think oh but kevin you

know like their advertising was so much

more effective during the pandemic

because you could sell anything during

the pandemic it was a pandemic it was

easy to sell stay-at-home fitness

equipment maybe that totally might be

true and in fairness for the three

months that ended september 30th of

2019 we ended up seeing connected

fitness product revenue of about 157

million so obviously we're way up from

there

and they spent 77.6 million on marketing

which works out to about 49

for every 100 of revenue so we've seen

these larger numbers before but the

problem is we're going from really high

numbers of advertising per dollar of

revenue to a low during the pandemic and

then not

up to where we previously were but worse

we're now spending more money per dollar

of revenue than we did even in 2019 when

the company was less

known and again you could make the

argument that well the company was less

known so it was easier to sell back then

but wait a minute the more you have a

network effect

of of more people using peloton the

easier it should be to sell like

ultimately i want to be investing in a

company where

it's easier for them to sell not harder

for them to sell and right now it's

becoming harder for them to sell not

easier especially even compared to 2019

which in my opinion that's a problem and

that's not good uh in addition to this

because they continue to reduce their

prices their margin is substantially

being impacted right now and i know this

is a lot of bad news right now but uh

it's the reality that you got to be

aware of if you're investing into the

company so their margin

has fallen substantially back

in 2020 their gross profit

per

100

of bike sales or tread sales or whatever

was about 39.5 so if they had 100 of

revenue they took 39.5 of that as gross

profit before things like sales and

marketing and their uh you know general

and administration and their research

and development and their taxes right so

100 in for the bikes they'd keep 39.5

before they got to the other expenses so

cost of goods sold is what we're

subtracting there well now for every 100

they're taking in they're only keeping

12

before they get to sales and general

administration and research and

development which they're spending way

more on those things now so it's no

surprise that all of a sudden the

company's losing 376 million dollars

because they're spending like crazy

they're not getting the product sales

anymore

and their product margin is plummeting

because they're having to lower prices

these are all not good things here's an

example for you of how the math would

look so they mention over here that

their margin decreased substantially and

that was primarily due to the decrease

of their bike price from 1895 to 14.95

okay so let's understand this if at 1895

they had a 39.4

gross profit margin then that would

leave them with about 746 dollars for

every bike they sold

now drop the price 400

take that 400

off of their margin now they're only

making about 346 dollars 346 dollars

divided by the new price of 14.95

means their margins probably somewhere

around 23 percent it's a little bit

lower now at 12

so because of supply chain issues and

logistic expenses and stuff like that as

they've mentioned here so we do expect

that margin to come back up it's not

gonna be 12 for forever we expect that

to come back up and it really needs to

because otherwise they'll never go

profitable but still 23 gross profit is

is substantially less than that 39.6 we

used to have 23

divided by 39.6

uh is a reduction of about 42 percent

it's a 42 decline in in gross margin and

that's not good

so

you know having to reduce the prices

to these levels makes me worried that

peloton soon is just unless they

innovate with some new products and they

end up convincing people to use their

products

peloton might end up becoming a sas

company which is really weird to say

because obviously they're a product

company that also sells a service uh you

know they have the trainers uh they've

got great service or great you know

great software

but uh the the problem is if we end up

with zero margin on the hardware and

we're really just trying to get

subscription revenue fine how quickly

are we able to grow subscription revenue

well if we compare year over year for a

company that's that's valued

pretty highly i mean it's a 16 billion

dollar company uh you know the grand

scheme of things it's it's not extremely

expensive compared to maybe other

companies that are 50 to 100 billion

dollars right but for a 16 billion

dollar company we'd want to that that

has no revenue we'd want to see some

substantial growth right and we used to

see substantial growth we used to see a

lot of growth

but take a look at this if we look at

the

subscription

revenue subscription revenue very very

important

we are at

304 right now in millions of

connected fitness revenue we used to be

at 156 so that's pretty good that's a 94

bump so that is good we want to see that

okay that's very very good now if we

compare this to

the good old days well we'll take a look

at this we saw subscription revenue

double in 2018 to 2019 from 31 mil to

about 67 mil a little bit more than a

double so this is good we're still

growing that subscription revenue at a

high pace so i do like that about

peloton

the question though is how long can we

maintain this because now

if we have subscription margin somewhere

at about a third see they spend about

33 dollars for every 100 of

subscriptions that they have in order

for them to become profitable they're

really going to have to get their sales

and marketing their general

administration and their uh research and

development costs they're going to have

to get all of these down substantially

probably under

40

so that way if you are selling hardware

breakeven uh you're under 40 for your

operating expenses and you're at say 30

percent uh for in expenses for your

subscriptions well then at least maybe

you've got some money left over to

actually turn a profit for shareholders

but right now

the biggest concern here is a slowdown

in the hardware sales which could

potentially end up leading to a slowdown

in the amount of people signing up for

subscriptions for peloton so far we're

still seeing good growth and this is

exciting i like that we're seeing good

growth in the subscription model because

it could mean that a lot of people are

using the subscription service without

actually having uh the peloton hardware

which is fine

because again the subscription is is

much higher margin uh taken 70 ish to

the bottom line uh or to the gross

profit line rather which is great

but again

how much in sales and marketing is

peloton having to push to get people to

sign up for this uh for these

subscriptions and is churn going to

continue to increase so bottom line

does it make sense to invest in peloton

in my opinion i'm i'm not enthusiastic

about the risks that we have here the

risk reward

is is skewed for me

i do not like that churn is increasing i

don't like that advertising efficacy is

going down i do like that subscription

revenue is is still exploding we still

doubled year over year

coming out of september of 2020 which is

great but there are some serious

concerns in terms of how long is that

sort of growth going to last

is churn going to continue to go up and

what's it actually going to cost us to

where are we just losing money to try to

acquire customers that's the issue

because even though we saw a doubling in

the subscriptions we also saw a more

than doubling in sales and marketing in

fact if we take

284 million divided by 114 we uh two and

a half x our marketing spend but only 2x

are subscriptions

so again back to that advertising

inefficiency whether they blame apple or

it's because the market's saturated and

people just aren't interested in

pelotons right now i don't know this is

not a stock that i'm in it's not a stock

that i'm going to buy the dip in um but

i maybe play options on it maybe but

beyond that maybe selling puts and

trying to farm some higher volatility

beyond that not a stock i'm interested

in

these are my thoughts on what's going on

with peloton if you found this helpful

check out my programs on building your

wealth down below and the stocks in

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the way i do and folks we'll see the

next one thanks so much

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