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No Mercy No Malice

Ma Ma Ma My Corona

March 6, 2020

5-min read

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.

T Algorithm

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, 

P.S. My new podcast, The Prof G Show, launches in two weeks. Subscribe on Spotify, Apple, or anywhere else you get your podcasts.

56 comments

  1. Joel says:

    Thank you sir

    • Joel says:

      Because I know this would make you proud, I have taken a good chunk of my Peloton winnings this year and started a philanthropic fund with $50,000 to help immigrants who dream of starting their own business get started. Thanks to you.

  2. c1ue says:

    Been thinking about your Peloton comments. Ultimately, disagree. Apple isn’t in the business of social media – they’re in the far bigger business of selling hardware. More importantly, repeatable hardware sales. Peloton is a services company – and services company margins are inherently crappy compared to software. True, Peloton’s content is provided by their users, but services are still not a razor blade for Apple to sell razors for. Lastly, it isn’t even clear that Peloton’s services are profitable: they lost $200M in 2019, and their quarterly losses are $20M less than their subscription revenue. And it isn’t even because they’re losing money on the hardware – Peloton is spending over 40% of revenue on sales and marketing. Are you sure this isn’t another Casper?

  3. Joel says:

    Thanks Scott. Jumped in with half my portfolio this morning. Don’t worry Im not a Democrat so I wont blame you if it goes against me. Ill take full responsibility like an adult should and cut my losses. Btw, 88% of shares are short so if your theory is correct it could be really, really correct.

  4. GS says:

    A side note: CDC SARS-COV-2 diagnostic instructions list among required materials just 1 type of RNA extraction kit, made by Qiagen, 1 type of RT-PCR kit, made by Thermo, and 1 model of RT-PCR instrument, made by Thermo. And Thermo just acquired Qiagen. Nice to be Thermo in these trying times.

  5. ednazperry says:

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  6. TG says:

    Weren’t you bashing on peloton two months ago?

    • Raul says:

      Same question here Prof. I recall you labeling Peloton a overvalued unicorn before it went public.

  7. Stephen Klein says:

    Peloton’s settlement with Flywheel was an impressive showing in regard to the moat Peloton has with their patents as well.

  8. Richie says:

    Interesting post. I share the same thesis on PTON. It.’s a stock that I will continue to add will be a long term hold: I originally wrote the below in Nov 2019. Why? Peloton is building a huge community of (obsessed) brand ambassadors. New, engaging content added daily that they own, curate and control. Hardware sales will slowdown but longtail growth will be in digital and partnerships. I predict brand expansion in apparel, wearables and digital products. Imagine Partnerships with Nike, Apple/Fitbit, or nutrition, meal plans, meal delivery. Could this be a full stack “wellology” provider? Starter position added at $24.44 .

  9. c1ue says:

    The good news: the really old people I know (or whose children I know) don’t care about nCOV and will still take their cruises at the moment. The bad news: losing the nCOV cruise lottery means getting stuck on a cruise ship for a month. Turns out there were 2 cruise ships in Japan that were quarantined. And now there’s a 3rd in California: previous set of passengers saw 1 die and 2 different central CA areas introduced to nCOV; now the ship is quarantined off the coast of SF. Another month of nCOV “free” cruising? Is that a net win for the passengers?

  10. Bill B. says:

    I’m not seeing where SG was previously so (-) on Peloton’s business. Sept. 27, Yogababble called them out on a little S-1 BS but that’s all I see. SXSW was never gonna happen. Like Ben Hunt said at least a couple weeks ago, MLB might be next.

  11. Jon Luker says:

    Everyone is entitled to change their mind, but you draaaaaaaaagged Peloton not too long ago yet make no mention of what changed your mind about it.

  12. John Keith says:

    Does Peloton’s digitally enabled two way engagement serve to keep its machines out of the council clean up for (6) months longer before inevitably joining the ellipticals, step and rowing machine epitaphs to faded exercise resolutions?

  13. Clark Newhall says:

    Check PMCCF. another ZOOM?

  14. SHASHI KAANT BHATNAGAR says:

    SXSW got cancelled due to fears of Coronavirus

  15. lazza says:

    Steady hands – ha ha ha ha ha haaaaaaaa ha! Good one Scott!

  16. John Azevedo says:

    I cringe every time you mention politics, wars or foreign affairs. George W. Bush was a steady hand for creating a war in Iraq out of lies. Obama was a steady hand in rewarding his finance buddies the privilege of buying default mortgages for pennies on the dollar while the homeowners were not allowed the same option but thrown out on the street. Neither of those things will happen under President Sanders.

  17. Julia says:

    Travel safely and enjoy your time with Katie C

  18. yersinia pestis says:

    one of your dullest, least topical and tendentious columns.

  19. King says:

    Did you recently get endorsed by Peloton or purchased stocks of Peloton? Your overnight change in view is worrying.

  20. Drake says:

    I’m nominating “Fear = attention” for a Pulitzer. Peloton should license their platform and put SXSW online. Fully interactive. Bonus: pedaling audience = listening, not refreshing CNN feed on Covid. Valuation: 2T. Off-topic: American Gothic, i.e. Meg and Jeffrey took down another $750mm; Tab is now at $1.75B. Next up, ‘Quibi’ renamed “Foopoi” and Vision Fund wrote that check too.

  21. C Deming says:

    Here’s a pretty good rule of thumb for me: If you’re still able to make jokes about the coronavirus in your email, it’s probably not a good time to buy yet.

  22. Michael Storch says:

    Fresenius is about to lose a lot of customers. Folks who feel under the weather cannot skip dialysis for very long (14 days? fuggedaboudit), and the folks who go sit for three-to-five hours three times each week tend to be older & sicker & weaker to begin with. Anybody short ?

  23. CTM says:

    Your link to where VP had to walk back Trump’s alleged “statement that infected people should go to work” didn’t link to that statement at all (probably because he didn’t say it…) You shouldn’t waste people’s time with faulty links. “So if, you know, we have thousands or hundreds of thousands of people that get better, just by, you know, sitting around and even going to work — some of them go to work but they get better.” Where’s the word “should”? Isn’t it logical that a number of people have it, don’t have symptoms, blithely go to work, recover and never make it into the denominator used to determine mortality rate?

  24. Jim Barber says:

    I don’t know. To me, Peleton is just the new Iomega.

  25. Dr. Beeper says:

    Luckliy, the SXSW organizers are smarter than @profgalloway

  26. adam says:

    I love Scott — who doesn’t… but jesus a blind man could have told you that the Cruise industry is a donut — soon to be re-racked in bankruptcy…REPENT — make the short call. I did.

  27. John Oppenheimer says:

    Just cancelled as we speak.

  28. SWB says:

    Your post is partisan. Remember when everyone criticized the President for restricting travel from areas infected with the coronavirus? Among other vile comments, they called it overreacting. So per your Note: “The government has one job: to overreact.”, I guess the Trump administration was doing its job! It is so tiring to hear the non-stop bashing and the lies.

    • RecoveringDem says:

      Agreed SWB. An 20/80 post [only 20% worth reading]. Canceling SXSW was the right to do. P.S. Couric is old [corrupt] news.

  29. RMV says:

    Hey Scott. Interesting point of view. Thx for the Analysis, cant please everyone. We do with the information as we shall. ~R

  30. Leigh says:

    Scott, These exercise trends never seem to last long term. I wouldn’t invest my money in 1 share of Peloton.

    • Mike says:

      Yeah, I don’t get why he’s so bullish here. Is the market size for people paying $2k for a piece of gym equipment big enough for growth? Are they really that protected against Nautilus stealing the best instructors and putting price pressure on the offering?

    • Nate says:

      @Mike I think part of the optimism is because Peloton is now offering a monthly leasing fee for a bike instead of buying outright. It’s pretty reasonable.

  31. Tking says:

    Who does your artwork? A down channel Ralph Steadman? Do they use Trump’s Sharpie? Brings folksiness to the high brow. I enjoy it.

  32. Moss Kardener says:

    Scott, thanks for another timely and educational read. I nearly always catch myself forming a wry smile on my face while reading your posts!

  33. Paul says:

    I usually stop reading once i come across politics but even more so when in a partisan way…I do take issue with you claiming O’Bama handled the Great Recession…Please explain to any of the seniors who saved money their entire lives and invested this lump sum into “safe” investments such as CD’s (old school preservation of principal thinking) who saw interest rates go to zero…yes Scott ZERO…to where by they had to either consider the stock market or alternative investments just to earn a peaceful living…this lasted for at least 5 years if not 10…while at the same time our Great O’Bama just bought a $15 Million dollar Martha’s Vineyard home….You are fantastic, satirical, and intelligent…but when you enter your political opinion and/or spin you lose all credibility…professor.

    • gary selvaggio says:

      I’m guessing that without the recovery efforts made in 2008, all those seniors would have lost it all and been put out on the streets.

    • Saul says:

      Very cool story, Paul.

    • Paul says:

      @gary selvaggio Hard to say…Bernanke was the Fed Chair…He lowered the rates…with the belief that the lower rates would stimulate consumption and investment…

    • Nate says:

      @Paul He “loses all credibility” when he “enters his political opinion.” According to whom? You? Because you disagrees with him? Pretty strong words, Paul.

    • lazza says:

      @gary selvaggio I think anyone who follows the markets knows it was Bernanke who saved everyone’s behind…O’Bama was just along for the ride…

  34. Pat says:

    1. Sharing the stage with Katie Couric will be fun. 2. Your “comfort” comparison is nonsensical. You found comfort in Goerge Bush through his handling of 9/11 and Barack Obama’ s handling of the recession, “their steady hands”. To make a comparison, one must compare the relative same. For example, a comparison of the H1N1 swine flu outbreak versus the coronavirus outbreak makes more sense. I believe over 12,000+ people died in the US during that one. What did Barack Obama do? What actions did he take, legislation he enacted to reduce/prevent deaths caused by the swine flu? That should be noted here to substantiate a valid comparison. Your failure to compare what Obama did/did not do during the Swine Flu outbreak versus what Trump is doing now is WAY is lackluster at best 3. You quote the New York Times about the 9% cut to the CDC funding in the proposed 2021 federal budget. You CONVENIENTLY did NOT quote them in entirety. From the NYT article….”The president’s budget would cut funding for the Centers for Disease Control and Prevention by 9 percent overall. But it would raise funding levels for the center’s infectious disease activities. The White House budget said its cuts reflect an attempt to “refocus” the CDC on its core mission of preventing and controlling infectious disease and other emerging public health issues, such as opioids.” The budget also targets specific programs meant to fight particular cancers and prevent common chronic diseases, combining them into smaller, combined funding streams.” This is just inferior work on your part. Good luck. PD

  35. Phil Simon says:

    Good stuff as usual, Scott. Any chance that you could look at Slack next week under this same umbrella? I’d think that it’s poised for a run-up as well but I’m no Buffett. In fact, people want to know my purchases so they can short them. #TipYourWaitress

  36. Tim says:

    Did Peloton pay off Scott? He turned from the biggest bear to their biggest bull.

  37. Ed Markey says:

    Hat tip for using “affect” and “effect” correctly…and in the same sentence! I’m assuming your education start up covers grammar…

  38. Heather Stark says:

    Re peloton – attractive proposition for those who like spin classes *and* paying a seriously eyepoppingly large lot of money for indoor activities. Darn thing was all over Manhattan when we visited last summer. The fit here is good. Clearly you think there is still vast untapped eligible market?

  39. Michael D Leffler says:

    Scott, your analysis is always spot on with a touch of self-deprecating humor sprinkled in here and there, but when it comes to Trump, your judgment (the lack thereof), and ranting reminds me of hooded soy-boys parading the streets of Portland, Oregon and woke (asleep) angry entitled students at some of our indoctrination camps (universities). Being marginalized in one’s world-view based on hyper-biased narratives never serves anyone’s best interests especially when it doesn’t reconcile with what’s actually happening in the real world. Give yourself a much-deserved break, step out of the bubble and get some fresh air. Trust me, you’ll be glad you did…

  40. Jeff barnett says:

    I’m taking your current S4 class and love it. Is APRIL a different class or the same one?

  41. Jockular says:

    Congrats on your mellow MIND: snarky with a dash of FUN sauce! EXACTLY what I need with NO stocks working, except beloved ZROZ ….

  42. Piet Beukman says:

    Just a few months you really panned Peloton when you correlated mission statements with performance. So what changed?