November 16, 2022 - 9:39am EST by
2022 2023
Price: 11.40 EPS 0 0
Shares Out. (in M): 340 P/E 0 0
Market Cap (in $M): 3,900 P/FCF 0 0
Net Debt (in $M): 750 EBIT 0 0
TEV (in $M): 4,650 TEV/EBIT 0 0

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PTON saw its stock rise from a $20 IPO in 2019 to $162 during covid and now trades at $10. The original short thesis was that PTON targeted a limited TAM that is facing many new entrants. It is the next FIT or GPRO. Current bike sales are close to pre covid levels and margins are negative. While it seems the bear case is right I think there is a lot misunderstood.



First, current demand is abnormally low due to a cap on marketing spend. Foley’s mismanagement left the company with too much high cost inventory, bloated opex and a bad balance sheet. The result is that PTON is under pressure to get to FCF breakeven quickly, while selling bikes at negative gross margin (I estimate a COGS of $2,700 on bikes made after summer 2021 compared with $1,400 before then). The result is that the company cannot spend much on marketing. Pre covid, PTON’s CAC for hardware subs ranged between $950 and $1,150 (cash, ex SBC). It is currently under $800, I don’t think it can go much lower and that implies they cannot sell more bikes. On my math, the company will flush out the high cost inventory at the end of CQ1 2023. Gross margins on hardware are currently negative 12% excluding 1x items. Or $250 per bike. Gross margins pre covid were 40%. If margins can return to 10%, that implies $550 in incremental profit per bike sold. They currently sell over 100k bikes a quarter and that implies $55M more profit to plow into marketing. At an $800 CAC, that translates into an extra 65-70k subs per Q or ~270k a year. That translates to 9% incremental growth in premium subscribers per year. The street is at 6% premium subscriber growth in FY 2024 when it seems > 10% is more likely. They used to earn 40% GM on equipment, if they can earn 25% that translates into a $900 gross profit on equipment which can fully fund the CAC for the customer. In that scenario, if the demand is there, subs will grow a lot.




Second, the old management team was truly horrible. They focused only on growth, pursued a strategy of very expensive hardware matched by more or less unlimited operating costs, created a “yes man” culture at the top that ignored the substantial base of employees predicting a reversal of covid demand, and they were awful at marketing. The new CEO has shown that the operating costs were indeed bloated. He fired their CMO and has publicly criticized their go to market strategy, and I think a better strategy will lower their CAC.  He is focusing on a good/better/best strategy both for hardware and the app, which will expand the TAM. After speaking with several former employees, I believe he has retained a good number of the best ones and they buy into his vision.



I can a consumer survey that found a huge interest in the Peloton bike and $44 app. The brand is strong and aspirational. The barrier is price. As the new CEO executes on his good/better/best strategy demand should rise well ahead of street estimates.

1 – my research suggests they can get to a $1k retail price for the bike by offering a smaller screen, a cheaper stereo system and a lighter motor. At $1k the TAM expands considerably.

2 – I think they will tie up with other bike manufacturers and offer a fully integrated Peloton app to their customers for $25 a month. The premium tier will remain a Peloton bike plus a $45 subscription, the midtier will be a rival lower quality bike for $25, and the low end will be the free app.

I ran a consumer survey and the brand is incredibly strong. The main barrier is price. Anything the company can do will to lower price will expand the TAM a lot. If they can get the bike to ~$1k with a $25-30 subscription price the service can sell to the masses.

3 – it is important to segment the market across different types of households. If two people in a household are going to use Peloton equipment, it is actually a reasonable price.

Putting it all together

  • If there is only 1 person exercising in the house, PTON the Peloton hardware is limited to rich HH, as it costs as much as a high end gym.
  • If PTON creates a 2nd tier, $25 to ride a rival’s bike with a fully integrated PTON app will have a total cost equal to the median gym membership. PTON must find the right price that does not lead to unfavorable cannibalization of the $44 premium package.
  • For a 2 person HH, the economics of a PTON bike are much more palatable. It is materially cheaper than a high end gym membership and cheaper or on par with a median priced gym membership.  The short thesis underestimates how much this expands the TAM.


  • PTON should dominate the premium segment of the home fitness market. Their current market share is 73%, despite many new entrants offering lower prices or novel form factors. Not one of Echelon, Hydro, Mirror, Tonal, NordicTrack or Bowflex are a close or even distant second to PTON in terms of market share and brand strength.
  • There are currently 25-30M US HH that have exercise equipment at home. I think that number will grow and PTON will be able to play in every segment of this market with a good/better/best strategy. Coupled with international expansion, a path to 7-10M HH subscribers does not seem out of the question (7-10M HH using either PTON exercise equipment or the PTON app fully integrated into a rival’s equipment)



The consumer survey I ran showed a lot of interest in the app, especially if they can get it down to a $5 to $8 price point v the current $13. The two barriers to adoption are price and a lack of awareness. The company says only 4% are aware of the app but my survey found that 1/3 had aided awareness of the PTON app. As I mentioned, their CMO was awful. All the target segments had a lower awareness of the PTON app, around 25% (targets like high income households, households between the ages of 30 and 45, exercise enthusiasts, gym goers, PTON lovers…).

The strongest rival to PTON is Youtube. Many people prefer Youtube because it is free, despite offering limited options of good classes and a heavy ad load. The vast majority of engagement is across a long tail of channels and classes. There are only a handful of youtube channels that have reached 1M subs and not many that reach 500k. often engagement on videos is weak. The Youtube channels differ from Peloton in that they cannot play popular music because they cannot afford the licensing fees. They cannot hire the best instructors: top PTON instructors earn more than the top exercise channels on Youtube without having to run their business and produce their own content. The top channels typically release 1-3 new classes a week. even across many channels it is hard to find new classes that are high quality, which is why not many have racked up a large number of views.

How can PTON get people to trade up from Youtube exercise videos? By inducing trial and lowering the price. Once people try PTON most will prefer it over youtube and can then select the tier that fits their budget. PTON should add an add supported tier. The success of Youtube exercise videos shows that people accept an AVOD offering. My calculation is that PTON could earn over $2 in monthly ARPU from ads, possibly $4 if engagement is high, but I think $2 is more likely. This makes a tiered offering easier to implement. They can offer the current app for $13, ad free. A mid-tier app with less content and ad support for say $7 to the consumer, $9 to PTON with ad rev. and a free ad supported tier consisting of a select few old exercise classes as a means of getting people into the funnel. PTON also has to advertise the product in a more targeted way. The 1/3 aided awareness should rise above 2/3 given how well known the PTON brand is.

I think the unit economics are good for scale players in this business. A few years ago I expected a fragmented market for exercise apps. But it is more like an oligopoly with a long tail. The main reason is there are economies of scale and those are amplified by a strong brand that lowers your CAC. The exercise app market is an oligopoly when it comes to scale players. The reason is that 1) there are some costs to scale an exercise app that offers 10+ forms of exercise. I estimate the fixed costs are over $20M. 2) the bigger issue is the impact on churn. To overcome high churn, you need a low CAC. To have a low CAC you need a powerful brand. that’s why PTON and Apple have the biggest market share. Followed by NKE which has not been able to engage subs for their free Nike Training Club app (they use it once a month despite it offering a few free classes). There are a few other apps of decent scale like Sweat and Fiton. In general, all rivals charge $15 or more bc they have fewer subs and a higher CAC than PTON. This means PTON can always underprice the competition, aside from Apple.



The Blackwell activist pitch goes into this in some detail. There are cost and revenue synergies for the likes of GOOG, AAPL, AMZN, NKE. The main asset is the brand, which is ranked in the top 3 consumer brands across many different surveys. Customer satisfaction is extremely high with NPS > 80 (at 72 now because of all the bad press).



I think they can get to 4.5M $44 subs by FY June 2027, 1.5M $20 subs and 4M app subs at an ARPU of $10.75 including $2 ad rev on most subs, figure $9 on average to the consumer. I forecast 28% gross margins on equipment sales and a $900 CAC on premium subs. That results in $6bn in sales and a 17.5% EBITDA margin and $1.70 in EPS (they have a $4bn NOL and will not be paying taxes yet). $1.30 fully taxed EPS.

As long as they can get equipment gross margins close to normal territory, say 20%, then they can grow premium subs MSD for many years. They should have a path to 4M premium subs and 4M cheap subs, assuming there is no mid-tier option. This results in a fair value of $8.50 today.

The real fundamental bear case would be that there is not much of a market for their cheap app due to Youtube, etc and that the company cannot sell cheaper bikes or partner with rival bikes without cannibalizing its core premium sub while also unable to expand the TAM through lower prices. Basically, if the vast majority of the market prefers a $10-15 app not integrated into the equipment.



  • Recession. They have the liquidity to withstand a recession and can cut back somewhat on marketing spend, opex and NWC. I would hedge the PTON long against other interest rate sensitive shorts.
  • Liquidity risk – I think risk of bankruptcy is very low. PTON has a couple more quarters of burning through its high cost inventory. After that point, it should be easy to earn positive FCF. Should a recession come, they can reduce inventory further and cut back on marketing.
  • Execution risk – they fired a lot of employees and pursuing new strategies wrt product, pricing and distribution. My work suggests most of the best employees remain and are quite enthusiastic as they never believed in Foley but do believe in PTON. Execution risk is dampened by the clear focus the CEO is bringing to the company compared with Foley. PTON is no longer trying to vertically integrate and control last mile delivery. This will simplify operations.  The yare also focusing on the US market as opposed to trying to grow into many more European countries.
  • the product simply does not create value for many. people prefer free Youtube exercise videos or a cheap app used on a cheap piece of equipment.
  • Rivalry in exercise equipment – The entrants have all done poorly. Other than ICON Fitness (Nordic track), nobody has achieved any degree of scale in connected fitness. This means that rivals must earn a profit on their equipment sales.  while PTON will never return to their 40% GM, rivals normally earn LSD EBIT margins off a 30% gross margin, ie rivals cannot go far below 30% gross margin. That should create a path to gross margins well above 20% if not 30%
  • Rivalry in the exercise app market – I see the main threats as NKE and AAPL. AAPL is using their service as a way to lock-in consumers into their ecosystem. The app only integrates with Apple watch, not rival fitness trackers. Apple is also raising prices to $11. NKE offers the Nike Run Club app which is meant for connecting outdoor runners, it is not about exercise classes. Their exercise app is Nike Training Club which offers a limited number of free classes. But engagement and adoption is quite low. It is not a core focus for NKE. The next most profitable rival is Sweat, that caters to women. It has decent reach but a narrower focus. After that, I cannot find any evidence there is any other app that poses a threat.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


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