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An In Depth Look Into Peloton – Why This Stock Is The Ultimate Long Term Becky Play

**Positions**: 145 shares @ 91

**The Play**: Buy shares or ATM leap calls

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**Introduction**

Peloton was one of the key winners during the coronavirus pandemic and has seen a recent hit to its stock price as the world reopens and Wall Street starts to bet against the company as things ‘return to normal.’ In this DD, I would explain that Peloton is more than just a company that sells expensive workout equipment to stuck-at-home upper-middle-class housewives. Instead, it is more akin to a combination of a digital based subscription service and a fitness focused social media company. All of this, along with some external factors, once taken into account, will let Peloton carve out a key position in the broad fitness market even after Covid which in turn will translate into a higher stock price.

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**Trend Towards Home Gyms**

Peloton was one of the companies that did exceptionally well during the pandemic as millions of Americans hunkered down and bought at-home fitness equipment. However, the mainstream mindset is that as things reopen and we transition “back to normal” many of these Americans will return to their old habits of going back to physical gym locations and as a result, Peloton will see significant headwinds to future growth. I do not believe this will be the case. I believe that despite gyms reopening, recent trends point to a permanent change in consumer behavior that not enough Wall Street analysts are talking about. Let me explain.

First off, despite gyms being reopened, studies have actually shown that a staggering 60% of adults enjoyed their at-home equipment so much, they do not plan on going back to physical gym locations ([link](https://www.glofox.com/blog/10-gym-membership-statistics-you-need-to-know/)).

What’s more is that other studies have also pointed to a favorable environment going into 2021 for Peloton and other at-home fitness equipment manufacturers. On the website RunRepeat ([link](https://runrepeat.com/fitness-trends#fitness-trend-hit-the-hardest-in-2020-gym-memberships)), it states that the number one fitness trend of 2021 among active adults are outdoor activities such as running, cycling, walking, etc at 59.1%. This is higher than the 51.6% stated in 2020. This is followed by the number two trend which is at home fitness equipment at 16%, which is a lot higher than the 2020 consensus of 11.2%. Gyms on the other hand comes in much lower at 8.2% in 2021, a stark decrease from 20.8% in 2020. What this shows is that there is a permanent shift in consumer behavior. The idea of a monthly subscription access to a public gym appears to be coming to an end and consumers are more interested in either pursuing physical activities outside or investing into their own personal equipment.

The website also stated additional information that helps the case for Peloton. It states that the fastest growing trend of 2021 is at home fitness equipment. In the US for example, the number of adults seeking at home equipment is up by a staggering 218%. What is more shocking is that the percentage of adults who see gyms as the best way to stay healthy is only 8.5%. This is a drastic decrease from the 20.4% we saw in 2020.

In conclusion, even after the pandemic, Americans are now more invested than ever into at home work out equipment and are turning away in greater numbers from the traditional physical gym. As the manufacturer of one of the most recognized brands for at home fitness, Peloton is strategically placed to reap the rewards from this change in consumer behavior going into the near future. In addition, due to the recent launch of Peloton’s Digital membership application, the company can also benefit from the growth of outdoor activities as well. This I will explain in greater detail in the next section.

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**The Economics of Peloton, Why Buying A $3,000 Bike Saves You Money:**

At first glance it would appear that Peloton only targets really wealthy individuals, since only those with some serious scratch in their pockets can afford their flashy workout equipment. Just by going on their website, Peloton sells their exercise bikes starting at $2,495 for their standard Peloton Bike (https://www.onepeloton.ca/bike) and treadmills starting at $3,295 ([https://www.onepeloton.ca/tread](https://www.onepeloton.ca/tread)). This of course is on top of the monthly subscription fee of $49 if you decide to go with the All-Access Membership which is available to those with the Peloton Hardware and the Digital Membership plan of $16 a month which is available to anyone even those without any equipment ([https://www.onepeloton.ca/membership](https://www.onepeloton.ca/membership)). This option is tailored to those who prefer outdoor activities such as the ones listed in the prior section. It essentially creates a studio like atmosphere while users do their daily jog, bike outside, etc. This is the app I believe that will let Peloton capitalize on the growth of outdoor activities.

To state the obvious, owning a Peloton is not cheap and it takes a special kind of person to fork over the staggering upfront cost plus the monthly subscription amount; however, that does not mean only wealthy individuals can find value within a $2,500 bicycle. Believe it or not, many people can actually SAVE money by buying a Peloton. Let me explain.

The average cost of a boutique fitness class averages $35 per class in major cities throughout the US [https://www.refinery29.com/en-us/fitness-classes-cost-expensive](https://www.refinery29.com/en-us/fitness-classes-cost-expensive). The average cost of a personal trainer can be between $40 – $70 an hour (https://lessons.com/costs/personal-trainer-cost). If you purchase a $2,500 Peloton, you pay $49 a month and have access to unlimited classes. Assuming you have two people who are fitness enthusiasts who attend classes twice a week, let’s compare how much they are going to spend on a yearly basis. Person #1 will not have the Peloton and will go to her spin class twice a week, the other, person #2 has a Peloton and forked over the upfront cost and monthly subscription.

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||**Person 1**|**Person 2**|
|:-|:-|:-|
|Peloton: ||$2,500|
|Yearly Classes/Subscription Cost|$35 *2 *52|$588 or (49 * 12)|
|Total Cost: |$3,088|$2,988|

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This shows that just by assuming a person goes to a spin class twice a week, they can save around $600 in the first year by purchasing a Peloton. If that individual has a personal trainer, then the saving costs can be even larger.

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**The Highly Addictive Atmosphere**

One unique aspect I keep hearing from Peloton users is how addictive the bikes are. Although the idea that working out and sweating can be addictive sounds absurd at face value, one look into the Peloton ecosystem can show us why that can be the case.

When you read the testimonials and reviews of Peloton one thing that will often pop up is how engaging the classes are. The reviewers will often state that although they are working from home, the Peloton coaches, the music, and the overall environment of the classes make them feel like they are in a personal spin class or with a personal trainer one on one. Because of this, plus the social media aspects of the app such as competing against your fellow classmates make Peloton classes a highly addictive environment for many of its users.

[link](https://www.worklifekids.com/blog/2018/11/22/i-hate-you-peloton)

To drive this point home from another angle that is not anecdotal, you can actually see the engagement percentage on peloton’s website. Right now the yearly engagement is around 94% yearly. This means that 94% of people who bought the Peloton bike still subscribes to the $49 monthly subscription 1 year after purchase. This is a big deal because Peloton does not make money selling bikes, they make money selling subscriptions as I will show you in the next section.

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**A Look Into Their Financials**

When I analyze the financial statement of a company, I first focus on their balance sheet, income statement, then their cash flow. I also focus on convertible stocks, warrants, or any other investment vehicles that will let insiders or any other interested parties sell their shares and dilute shareholder value.

*Balance Sheet*

Balance sheet is useful in getting a quick snapshot into the overall health of the company. Here I will look at their working capital to confirm that the company is indeed solvent.

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https://preview.redd.it/qvqzvbhczl871.png?width=1889&format=png&auto=webp&s=b3855a28fda017b37e23811abf3e4ae470d8d408

Net working capital is the sum of current assets minus current liabilities. Since current assets outweigh current liabilities, the company’s solvency is not an issue. Total assets outweigh total liabilities as well so the longevity of the company will not come into question.

*Income Statement*

For the income statement, three interesting things points out. First, is that the lion’s share of company revenue comes from sale of fitness equipment and no the application subscription. This is not surprising but it confirms where top line revenue growth is coming from. The second point of interest is that in the operating expenses section the company invests heavily into marketing and R&D. R&D tripled compared to this time last year which means the company will most likely increase their product lines. SGA remains relatively steady which shows the company’s management runs a tight ship and knows how to trim the fat around excess spending. This is a good sign especially for a growing tech company and it shows in their positive net income for the 9 months ended period in the third column.

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https://preview.redd.it/szp7yz7ezl871.png?width=1893&format=png&auto=webp&s=e1e0318008cbebf51166911a67045cc6ff6f876d

Another point of interest about their income statement is that even though subscription revenue accounts for about 16% of total revenue, it accounts for about 34% of gross profit. What this means is that Peloton does not make money selling the bikes, they make money via their subscription fees. The bikes are more so a tool to hook people in to the Peloton ecosystem where the real margins are made.

https://preview.redd.it/lsi147ngzl871.png?width=1898&format=png&auto=webp&s=5a83048fd953b02485ccf7caea537d63f7f7f134

*Cash Flow*

Cash flow statements are broken into three sections: Operating, Investing, and Financing.

Operating cash flow is useful for assessing the quality of the company’s earnings. If a company posts positive EPS, they should also post positive operating cash flow as well.

Over here you can see the company is operating cash flow positive which is really good because it shows high earnings quality as well as the company’s ability to bring in cash to the business. This means the operations are actually viable and decreases the chance for future share and debt issuance which will erode current shareholder value.

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https://preview.redd.it/gb4m5hgizl871.png?width=1896&format=png&auto=webp&s=6d7603bd672735c2d7698f38f8b21b53bddd757f

Investing cash flow is useful to assess where the company is investing their money and it gives good indication on where the management wants to take the company.

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https://preview.redd.it/4mkw58hjzl871.png?width=1902&format=png&auto=webp&s=81b7a632577caefa4769fa72656e7702cfe9089f

What stands out to me the most in this section is the first line-purchases of marketable securities of -$450m. What this means is that this company is buying back $450m of their own shares per quarter which is really good because it increases the value of your stock holdings and elevates share price. This is a practice that is mostly attributed to blue chip companies so a growth stock like Peloton buying back shares is really impressive. What also stands out is that company increased their investment into PPE which shows that they are also invested into future growth which will really help long term potential.

Financing cash flow is useful to see if the company is taking on too much debt relative to earnings and if the company is either financing their operations through debt or equity issuance. This section is important as a shareholder because it helps assess the value of your potential investment into the company.

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https://preview.redd.it/ukit8zjkzl871.png?width=1895&format=png&auto=webp&s=05d00b45d506f74708e0b928ba677cdcac6c53d5

Over here you will see that this quarter the company did not issue out any convertible debt. This is a plus for current shareholders because it will help decrease the risk for future share dilution. This combined with their steady share buyback will help create a really positive outlook for this stock.

What do you think?

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11 Comments

  1. 35 * 2 * 52 = 3,640, not 3,088. And 2,500 + 588 = 3,088, not 2,988. Even if you’d written the correct math, you rounded up about $50 high per year on your savings estimates.

    I like how you multiplied the yearly gym subscription cost by TWO so that you could say ONE person would save $600/year. What if they had FOUR people in their house? Or SIX? There’s almost no limit to the savings! And their rent could be split six ways, too.

    It costs more for a singular person to buy a Peloton and maintain a subscription than the average gym membership’s price (not to mention the wide array of additional equipment available at the gym for no added price). Adding in extra people to your math to show a higher combined cost with the gym subscription while dividing out the Peloton so you can show it as an averaged cost is just manipulation. I’m not saying home fitness, machines, and subscriptions don’t have their place. I’m just saying make sure your math doesn’t come off as pandering (and double-check figures before posting).

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