Peloton: Good-Better-Best.

Introduction

Recently, I laid out an approach to investing called Product based investing. Today, we'll apply the concepts in that approach to a currently relevant stock, Peloton (PTON).

First some background: Peloton, a provider of in home, on demand fitness, recently went public in Sep of 2019. They priced the IPO at $29, valuing the company at about $8 Bn. As of this writing the stock is trading at ~ $25.5, putting it's market cap at ~ 7.1 Bn.

With that, let's look into Peloton's expanding product portfolio and what that means for it's future.

Identify Products

Most people would agree that Peloton, with their blend of beautiful fitness machines and aspirational live classes, offers a unique, convenient and premium fitness experience for people who can afford it.
As Peloton's CEO, John Foley, often mentions in the company's earnings call, this is the "best" part of their good-better-best strategy, which means that the good/better products are still to come:

• Affordable Treadmill: Reinforcing this strategy is an article from Bloomberg in Nov, 2019 that Peloton will likely sell a cheaper (than the current $4000) treadmill in 2020. 
• Rowing Machine: The same article talks about Peloton introducing a newer product in 2020 namely a rowing machine.

Not content with sitting still with what they have built, Peloton is actively focusing on expanding their product portfolio, increasing their reach and making it more affordable:

• Germany Launch: In mid Nov 2019, Peloton launched it's products in Germany. It was the first time they offered classes in non-English, specifically German-speaking classes.
• Digital App Price Reduction: In early Dec 2019, Peloton reduced the price of it's app only subscription from $19.39 a month to $12.99 a month.
• App Expansion: In early Dec 2019, they also released an app for the Fire TV, so that users can stream the classes on their TVs. Additionally they released an app for the Apple Watch for users to monitor various workout metrics.

Determine their Importance

It's clear that Peloton is doing a good job of expanding their offerings and they are doing it in a huge market that is rapidly evolving in their favor:

• Huge Global Market: The global fitness market has quickly grown into a nearly $100 Bn market (per Business Insider). This is primarily because of people's increasing focus on health and wellness. I would argue that this growth is set to accelerate as adults redefine what old age looks like via healthy lifestyles (more on khn).
• On Demand Fitness Spike: Per CNBC, spending on fitness classes and gyms grew just over 5% last year, but on-demand fitness spending jumped nearly 59%. Guess who is the poster child of on demand fitness? Yes Peloton!

Predict their Performance

The next question is how do we know Peloton's upcoming products are going to be successful and consequently accelerate their share of this market. The following offer clues:

• Immersive Experience: I recently tried a power walking class on a Peloton tread for a brief 5 mins. It was clear to me, within the first minute, that the experience they are offering is much more immersive than anything I have seen before. Not only that, the instructor introduced me to some moves that I had no idea helped in something as simple as walking.
• Cult Community: If you are skeptical of my 5 minutes analysis of the Peloton experience (and you would be right to), just read this article in the Atlantic that talks about the fanatical devotion Peloton users have to the company and the sense of community it enables for them.
• Great Team: One quick look at the Peloton leadership team corporate page, instills confidence that there are several accomplished individuals working together for this company. That, along with their past execution, leads me to believe that they are more likely to pull this off as opposed to not.

Summary

The key takeaway is that we are in the early innings of a fitness revolution and Peloton is well positioned to win big as this long game plays out.


• The contents of this blog are the personal opinions and investment choices of the writer. Please don't treat them as investment recommendations.
•  I have a long position in PTON.