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.

Product Based Investing

Introduction

I have wanted to do this since late 2016. "This" means laying out the investing approach I have adopted, often casually, to investing in tech and adjacent stocks. My hope is that I can help budding and seasoned investors alike, look at investing through an alternate lens.

Also, since everything needs a name, I refer to my approach as product based investing. With that, let's get to it:

Foundation

The rough idea underlying product based investing is that companies primarily provide either products or services to a market. Thus the performance of the products that a company has created is a great proxy for the company's performance. 

Additionally, in the stock market, the earlier, than the general market, one can estimate the performance of the product, the better the likelihood of making a winning investment. Ideally, you want to estimate the likely performance of the product even before the product has launched.

The above aspect in conjunction with things like the disruptive nature of the product, it's potential market size and underlying trends form the core of the investment thesis.

The How

Next, let's look into how one goes about implementing this approach:

a. Identify Products

The first step is to identify a company that is about to launch a meaningful product. We'll talk more about "meaningful" later but let's take an example to make this first step clearer. 

In mid December of 2016, AMD announced it's Ryzen CPU chips. These were processor chips to compete with Intel for high end gaming.  They quickly followed it up by introducing Vega GPU chips in early January of 2017. These were graphics chips to compete with Nvidia for again, high end gaming. 

The cannons were lined up. AMD was competing again. The stock was trading at roughly 10$.  

b. Determine their Importance

In retrospect, this was a pivotal moment for AMD. With Ryzen, especially, being a completely new design, they were back to challenging Intel for high end desktop CPU marketshare in almost 10 years. 

It did not take rocket science to figure out this was a big deal. A google search or two would give one everything they needed to determine how important this set of product launches was.

In theory the above steps sound easy, but in reality they require a keen interest in the tech industry and the time commitment to keep up with the news cycle around it.

c. Predict their Performance

This is where things start to get really interesting. There is no equation (Oh how I wish there was one..) that outputs that the products will be a smashing success or dismal failures. 

What this step requires is good old fashioned research which is a combination of google searches and more importantly industry specific blogs e.g. in the case of AMD, something like anandtech.com. Also, one needs to keep up with the news cycle, via sites like The Verge, especially around major tech events like CES.

Basically, what one is doing, is trying to predict how well the product will perform in the market. Again, this is more of an art than science and the more one practices doing this, the better they get.

It turns out these were successful launches. Over the next 3 years, AMD relentlessly enhanced these products to the point that in mid 2019 they had a significant lead over Intel with a 7nm process. The stock was now trading at roughly 50$. A 400% gain in 3 years. Not bad!

The When

It should be pretty clear that in the 3 years I mention above, there would be plenty of opportunities to make an investment. Having said that, the earlier in the cycle one can form a hypothesis, make the investment and then stay in it till the hypothesis changes, the better the returns.

Next Up

Alright, enough talk about the past. In my next blog post (coming soon!), I'll apply this approach to a currently relevant stock, PTON.


• 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 AMD, PTON.