Was Peloton Ever A Good Investment?

A good investment protects your money from permanent losses when known unknowns and unknown unknowns happen, and it grows your wealth over time.

By that yardstick, Peloton (PTON:US) has been a terrible investment. If you had bought the stock at IPO and held it over 2 years since, your money would have been worth roughly the same.?

If you were caught up in the WFH glamor stocks craze that hit wall street in 2020 and bought the Peloton stock at its peak in December 2020, you would have lost an eye-watering 85% of your money in just over a year. 100k would have been eviscerated to 15k. Wow!

This week the media is abuzz with news of the unceremonious ouster of Peloton's CEO and reports of the company's impending sale to a well-heeled Amazon or a Nike.

The question is, could this poor investing result have been foreseen earlier?

The answer is a resounding yes, and it was blindingly obvious to anyone who looked, like me.

Peloton sells stationary bikes and treadmills to affluent households in the US. It also sells subscriptions to well-made and live-streamed exercise classes. The user experience is great, the products are slick and customers are loyal. Great so far, right?

The hardware is contract manufactured and barely makes a profit. The markup over cost was about 9% as per their annual filing in June 2021. Subscriptions is the profitable side of the business, with about 62% markup over cost. Peloton charged around US$ 35 per month per family subscriber, positioned against the cost of a high-end gym membership.

Now, let's be extremely generous. Let's assume that both hardware and subscriptions have 100% profit margins. In other words, earnings equal revenues with no costs whatsoever (there is no such business on this planet). Let's further assume that the tough hardware business with one-time revenue is now a uber-profitable subscription business with monthly revenues for many years into the future. By assuming this, we are making Peloton’s subscriptions business nearly twice as profitable, and then inflating the size of this subscriptions business by nearly 5 times! We are being wildly generous!

Peloton was trading around 50 billion market value in December 2020. If you run the numbers assuming the above, Peloton stock was trading as if it had about 80 million subscribers who are going to stick around for years to come.

In reality, it had about 2.2 million subscribers!?

A mere 3% of this lofty 80 million implied subscribers figure, and even after we made wildly generous assumptions in the company’s favor.

Another way to look at this is that the stock market is asking you to pay a price that will take about 40 years of business performance to recover, assuming that for these 40 years these wildly optimistic assumptions would still be true.

Clearly, the stock was trading disconnected from reality, and this levitation was bound to deflate, and hard, sometime in the foreseeable future. We stayed miles away.

We could not have predicted that reality will catch up with the stock just over a year later, but even back then, it was very clear that Peloton was a stock that was the opposite of a good investment - one that protects your money in bad times and grows your wealth over the years.

I was asked about Peloton at a webinar many months ago, and the above was my answer then, written down in this article now.

Disclaimer:?This article is not investment advice. It is a biased opinion and may be wrong. Do not rely on the information here for any investment decision that you may make. The?author?or his?investment firm?may be long, short, or uninvested at any time in the securities discussed in this article and such positions may change without notice. Click?here?for other details.?