Ma Ma Ma My Corona
Tim Ferriss and Sequoia Capital are encouraging people not to go to SXSW and to adjust for the “black swan event of 2020.” Firms cancelling, and minimizing their burn, is understandable. While catching corona would be bad, worse would be passing it to someone vulnerable. I put my trust in the CDC, who’ve told me it’s ok to go to Austin, and to wash my hands and not to touch my face. Great, there goes that hobby.
Ozzy Osbourne and Facebook both pulled out of SXSW. Pretty sure Ozzy already has it — he used to eat bats on stage. Anyway, Ozzy and the most dangerous organization in the world are out. This was a clear signal to me, and I’ve decided to go twice this year. I’m, no joke, doing a keynote where I’ll share the stage with Katie Couric. She, Jim Bankoff, and I are discussing media start-ups (I have an education start-up). This is something I never imagined, and I’m still processing what connective tissue, or butterfly flapping its wings in the Amazon, is bringing me and Katie together in the Lone Star State. #winning
I used to find comfort in our leadership during times of crisis — both George W. Bush and Obama were steady hands through 9/11 and the Great Recession, respectively. But no longer. The initial response from Western leaders was to manufacture and distribute low-cost testing kits. In the US, we cut interest rates, and our president proposes to cut funding for the CDC by 9%. We then have someone who botched an HIV outbreak and doesn’t believe in evolution try to explain why the kits aren’t ready. Then he’s tasked with walking back the President’s statement that infected people should go to work.
Note: Before sending hate mail, recognize it’s not partisan to observe idiocy. The government has one job: to overreact. Not declare victory when cases are doubling.
Taking precautions can save respiratory systems and, most important, the lungs of people with weaker constitutions. Yet I wonder what has been the cost to our nervous systems during the three months of fear and hype we’ve been through, in the shadow of screens with increasingly creative and scary infographics. Media algorithms know: fear = engagement. Your lungs are ok, but how’s your resting blood pressure? Stress affects more than your respiratory system, and the effects are long-term.
Let’s. Talk. Stocks.
Last week we wrote about playing defense: companies that will experience a temporary downturn but are robust enough to survive the shock — e.g., Hudson News (–47%), American Airlines (–42%), and Carnival (–33%). Their stocks should return to pre-corona levels. CNBC focuses on big companies so they can run ads from trading firms hoping seniors will let their returns be eaten up by fees. There is scant reporting of the sector that, similar to seniors and people with underlying health conditions, will have a much higher fatality rate … small and midsize business. Apple and SXSW will be fine. It’s the regional airline and the event planning firm that may not make it out of the ICU.
This week, we talk offense — companies that will register an increase in business due to COVID-19, and may enjoy a step change upward. Zoom is one of those companies. Today we focus on Peloton. We are in the midst of the largest work-from-home experiment in history. We are also likely experiencing a shift to working out from home.
Peloton’s rally will outlive coronavirus. The firm has all the makings of an exceptional business and will clock over $1 billion in revenue this year — YOY growth of 69%. In addition, Peloton ticks many of the boxes in the T algorithm. The T algorithm are 8 factors that could take a company to a trillion-dollar valuation. (We dive deep on this in my two-week Strategy Sprint — sign up for the April sprint session here.)
Recurring Revenue: Peloton is quickly approaching 1 million connected subscribers, locked into a recurring revenue relationship with the brand. The firm is also offering an option to pay a monthly fee vs. buy. The connected fitness firm enjoys a Netflix/Prime-like 93% retention rate. This is greater than most SaaS firms.
Margins: Margins are the litmus test of the value add, or differentiation, that an organization brings to its product/service. Firms typically provide either growth or margin. Occasionally, a gangster appears and offers both. Peloton is not Facebook or Google, but it has greater margins than Apple, and (law of smaller numbers) is growing much faster than the Four, 77% YOY.
Accelerant: Peloton attracts premier talent from top fitness studios to exclusively teach within the Peloton ecosystem. These instructors are poached from the likes of Soul Cycle, Equinox, and Barry’s Bootcamp. Peloton pays instructors $500 per class (over 3x that offered by Soul Cycle and 9x Equinox) and awards instructors equity in the business, giving them a vested interest in the firm’s growth. In turn, instructors achieve celebrity status, some building social audiences well over 300,000.
Vertical — hardware: 85% of Peloton’s connected subscribers own Peloton-manufactured equipment, enabling control over the experience and differentiation.
Vertical — fulfillment: Peloton also fulfills 58% of its orders (delivery and setup). This vertical integration allows the company to create a customer-centric experience and earn a Net Promoter Score of 86. This is off the charts. The firm frequently mentions its goal to be the first 100 NPS company.
Appleton (Rundle & Flywheel)
The only thing better than recurring revenue is a recurring revenue bundle that could form a flywheel. Peloton riders are fanatics. There are over 250,000 members of the wildly popular Official Peloton Member Facebook page. These people post 23 times per hour and interact with each other through comments and likes. Just as The League introduces Ivy League socialites to each other (shouldn’t it be called “Douche-League?”), JDate connects Jewish singles, and Raya connects models and the social elite, Peloton could begin connecting fitness-minded singles who become more engaged, riding, and swiping.
I believe there is a floor on the stock, as there are few firms that are a more obvious/natural acquisition by Apple than Peloton. Apple could pay a 50% premium for all the outstanding stock of the Apple of fitness, and register less than a 1% dilution. The acquisition of Peloton would provide the world’s most valuable firm with an additional, if more cumbersome, wearable that has greater margins than the most profitable product in history, the iPhone. The tie-up would also take Apple from letter D to G in one of only two sectors that can move the needle on a $1.3 trillion firm — healthcare. (The other is education.)
The stock is now a broken IPO, trading below its initial offering, but the business will likely grow into or past its rationalized value. Unlike the rest of the economy, Peloton has wind in its pedals.
Life Is Risks
Nothing wonderful happens without taking an uncomfortable risk. I’ll be dead soon, regardless — it’s all going so damn fast. Every night I put my sons to bed, I ask a nonexistent god where the pause button is. So, next week I choose to travel to SXSW in a tube with recirculated air, and discuss media trends with Katie Couric and Jim Bankoff in a (hopefully) packed hall — people love Katie. Before and after our session, I will eat Tex-Mex, go to crowded bars, and shake fewer hands. I’ll have a price-gouged Purell in my back pocket.
Life is so rich,