Peloton – Riding Beyond Its Pandemic Play [SGO 26]

Our friend for today has a very interesting story structure for us so joining me today to geek out on this fitness company Peloton is Max, Max Koh. You can find him on Twitter at @heymaxkoh. He also has a Substack, just go and search his Twitter account. He has a very interesting story because he was like a super bull for Peloton but he’s recently released all his positions. Now, he says that he’s not a bear, he’s just neutral coming back to try to figure this company and I think that’s an interesting story: how does an investor go from being super bullish about this growth company but then after a while, tweak their perspective and essentially shed his position? 

It’s not exactly an easy shed. He lost a little bit of money but for all that and more, you should join us today, and of course you can go and reach out to him to talk a little bit more. But today we’re going to focus on how Peloton is struggling with some of their growth initiatives. Where is their future going forward and of course the most important thing is how Max structures his portfolio and what is the reason behind he being so bullish. He’s going to give you a super bullish case for 45 minutes and then sell the stock, sell his position. 

For your reference sake, this episode was recorded on the 16th of December 2021 and it does not serve as any form of recommendations to buy any stocks. It’s only for entertainment and education purposes only. Thank you for loving what we do and empowering us financially to do more for you. So let’s geek out.

Welcome back to the show today, very happy to have a new friend on the show. So Max, you want to introduce yourself for all the listeners tuning in today? 

Max: Oh, okay. Hello folks. My name is Max. I’m from Singapore. I have been investing in the markets, using long-term investing for the last three years, so still pretty short track record. But so far, I’m having a lot of fun and returns so far are up to my own standards. So yeah, that’s mainly about it. I invest mainly in growth companies, not Singapore stocks, mainly US and international based markets.

Reggie: Singapore no growth is it? Is that kinda what I’m hearing? 

Max: I don’t want to, I don’t want to go too specific on that… 

Reggie: I mean… yes, yes. I hear you. And today we’re gonna talk about an interesting company in the sense that it is interesting as a business, but also interesting as in your take on the business, because you bought into it, you were very… you’re a strong believer of it, and then you sold your positions. Right?

So I think that’s the interesting transition that we’re going to elaborate as we evolve down today’s discussion, but the company we’re going to talk about today is Peloton. So what is Peloton? What do they do, a lot of people will just think: they’re just a bike company, like, yeah, share with us more.

Max: Yeah, sure. So I think I’ll start all the way from what exactly it is. So Peloton is a connected fitness company – that term is a very big label. So essentially what they do is: they sell exercise equipment on a very bare bones basis that allows people to do fitness classes via the internet.

So I think these days… I would just give a simple breakdown first from a layman perspective: like in Singapore – they are not available in Singapore – but in Singapore, you see people attend like spinning classes at the gyms, what have you; and then some people do it at home if their houses are big enough, landed, all those stuff where they can buy the exercise bike; and then what they do is that they then get their phone or an iPad, and then they go for YouTube class, all that kind of stuff; and then so they use that to instruct them on how to actually keep fit and do a cardio. So mainly Peloton, what it does is it sells exercise equipment.

As of now it’s mainly an exercise bike, which is the spinning machine and a treadmill that comes in-built with fitness classes, which means they come with their own LCD screen, which is [this] big a** screen in terms of instructors following you or teaching you how to follow them in terms of doing the classes with them or doing the exercises with them; and then of course they have other stuff like boot camps and all the physical strength workouts which we can get into later; but mainly that’s actually what they do from a bare bones basis. And then afterwards, maybe to go a bit into the details – so what is actually the business model is [that] they many generate revenue from two ways.

The first way is what I talked about. They sell these hardware equipment. So the label that they use in their [indiscernible] or their annual report is called ‘connected fitness products’. So anytime you go connected fitness products, it means it’s selling the treadmill or the bike. 

And then the second thing, which is a smaller portion of their revenue… so the main money maker is still the connected fitness. And then the second portion is actually their monthly digital subscriptions. So because when you actually buy the bikes, you have to follow the classes or you want to follow the classes in fact, because their clases are quite interesting and quite outstanding, which we can go into later as well; but you pay a monthly recurring digital subscription that gives you access like an all access pass to the content and the classes and any new content that comes in. So 2 main revenue models, and of course they have a tiny stream coming from apparel. They’re trying to go more into the lifestyle side of stuff, but… 

Reggie: I sense a little bit of disdain there, like apparel… why?

Max: Yeah. Because of course it’s always very skeptical whether someone, some branch can be the next Lululemon, or the next Under Armour… it’s a tough business so… I kind of not taking that into account, even though some people will say, oh that’s optionality, but at least as of my risk appetite, of my investing, I think that it’s not something that I see in the cards yet.

So mainly two revenue models. 

Reggie: Okay. Cool. I mean, apparel is not their core business anyway. 

Max: Not yet.

Reggie: So yeah, it’s interesting, about optionality, but I think let’s focus a little bit on the connected fitness product, right? So I think a lot of times when companies come out with new terms, then the market has to grapple around like connected fitness, Isn’t honestly, isn’t it just a spin machine? 

Max: Yeah. You can say so.

Reggie: Alright, so how does that fair relative to their competitors? In the sense of this machine, what’s so unique about the product, why are people raving over it? Like… 

Max: I went there to say, I share that first, then I’ll move into their competitors in the space because that’s a bit of a… this is a bit of a new industry. So I would say the main competitors traditionally they are up against is actually your spin classes at the gym. So your boutique gyms or… in Singapore it’s also quite popular.

They are quite developed, people attend group spin classes together, or they go to the gym to work out. So that’s mainly, I would say, the traditional competitor that they’re up against against first and foremost, before we go into their connected fitness competitors. So I talk about the industry first. So the industry first and foremost, the thing that they’re are mainly fighting is just conventional gyms and conventional being classes. So I’d give a few examples, a few in SingaporeI don’t think are that popular, but there’s a presence in Singapore here. There’s this company known as a Barry’s bootcamp. They do like bootcamp classes.

Reggie: Very expensive.

Max: Yes. High end. Exactly [inaudible]. Have you been by the way, Barry’s bootcamp? 

Reggie: No, I’m not their target, but I have friends who are going, I’m like Wah, you go there 拍照 [take photo] only ah?” You know they always take photo, lighting very nice, everything… 

Max: Yeah, it’s quite atas [high class] actually, yeah, Barry’s bootcamp, but of course, a more direct competitor would be Soulcycle in America; and of course Orangetheory.

So Orangetheory is this well-known boutique fitness classes. They have spin classes, exercise classes, what have you. So Soulcycle, Barry’s bootcamp, Orangetheory; I just lump all these together for simplicity purposes – all these have a physical presence. So you have to go down to the fitness center or to the gym or to the boutique center, what have you, and then do the exercise alongside a bunch of whole sweaty people in a room and an instructor in front and all that kind of stuff. So that’s mainly what they’re up against. And so the main, if you ask me, your question was, what’s different in terms of the value propositions… at first I was quite skeptical, because this is just, like fitness equipment and then with a iPad front, which is what most bears or most people will be a bit skeptical towards. And it’s only when I start to do the math… so I give an example – I’ll just go into the numbers and then maybe you can just ask a bit if anywhere we get lost. 

So what happens is Peloton, their fitness bikes, they have this thing known as the Bike and the Bike+. The Bike is the the lower end version so let’s just assume that. It’s currently $1500, because that’s their main seller right now. The Bike+ is a… 

Reggie: When I saw the Bike+, I’m like “huh? Bike 还可以再+ (Bike still can +?)

Max: It’s just a bigger screen. It’s a bigger, much bigger screen. It’s a more… what’s that word, panoramic experience. The Bike+ is $2.5k but I’ll just assume that we just use the Bike, so it’s $1.5k. Previously, it was about $2+k and then over the last number of months, they have lowered it a few times to lightly expand the [indiscernible] which the management did see.

So anyway now it’s $1.5k. If you do the math, $1.5k… they allow all their customers to take up this thing known as a 39 months interest free installment plan using this, I would say, this buy now pay later company that’s big in the States known as a firm. But we won’t go into that for now, but so most people, or at least more than 50% of their customers that buy the bikes, use the buy now pay later financing plans, which breaks up the payment and then plus after you do that, every month, you must also pay $39 for the continual subscription of the classes, because otherwise it’s just a bike, it’s useless – you wouldn’t go and get such an expensive bike. 

So all in all, if you add that up together, those amounts add up. So you take like 1,500 divided by 39 plus a $39 per month; if you compare that amount to a Barry’s bootcamp or a Soulcycle, the range will depend and vary quite a bit. But for most of these boutique fitness classes, per class it’s actually like close to actually $20, $30 per class. Of course you can get the package, what have you. But when you compare that versus now per month for Peloton, you’re paying like less than a hundred bucks. And then of course you get unlimited classes and all these other things. And I forgot to add one thing, which is: after my own due diligence in the Facebook groups and forums that I was looking at… on Reddit, they have the Peloton [sub]reddit:

The reason people find value-add is because per membership, they allow up to five people per household if I’m not wrong. Yeah. Five. So on average, based on their track record of… per membership… or per subscription, they have on average of 2.4 to 2.5 people per subscription, which means that they are using it on a household basis.

So when you divide that by you and your partner, It makes it even lesser. So that’s the, from a monetary, tangible standpoint, I hope it helps you see the main value proposition, which is, $20-$30 per class versus like, if you split between you and your partner, it can be less than 50 bucks per month for an internet classes. So that is the main value prop as to what makes them different from a numbers perspective. 

And then of course, from a more intangible qualitative perspective, it would be a few things. Number one is, of course you can actually do it anytime, anywhere – you don’t actually have to like just go only for a certain time slot.

So this is actually pretty interesting which I can share, because I don’t have spin class experience, by the way, do you have spin class experience? 

Reggie: I don’t have spin class experience. But I’ve walked past spin classes and like, “all this bunch of people are crazy down there like *panting noises*”…

Max: Exactly. But I’m not talking about just that experience on class. But even preclass – so I don’t have spin class experience, even though it’s been on my to-do list to go and attend one, just for new decisions…

But that aside, so the reason… let me just digress a bit. So the founder of this company known as John Foley, his backstory for starting the company was because he was a busy executive, like Barnes and Nobles, and then he couldn’t find time to exercise. So he wanted to attend spin classes.

The frustration comes when all these spin classes, the best instructors, normally their slots get taken up very fast. It’s like the minute… like maybe they only release the slots like 24 hours in advance – once the bookings open, within five seconds, boom – it’s full – because people are like camping there to refresh the screen. And then when I asked a few of my female friends in Singapore to give the full context, they also faced the same thing. So I have some friends, our female friends who attend spin classes at Zouk because Zuki is no longer a club… It’s now an exercise studio. 

Reggie: Post pandemic, guys… big pivot, this one! 

Max: Yeah, exactly. And they said the same thing, which gave me a bit of a aha, so what John Foley was saying, actually isn’t just a story he’s crafting for investors.

So they are very pissed, also… my friends – in the sense where sometimes the good instructors, if they only do the classes at 7:00 AM that day, you’ve got to wake up early just for that class and then go all the way down to Zouk and you have to book it in advance. So it was very tough.

From a qualitative standpoint because I already covered the numbers side – the qualitative side is that it allows you to attend classes anytime, anywhere without having to book it, because a lot of these instructors, or you can attend the live class or you can attend the recorded class, because every content that’s done live, it also goes into the recordings.

So that whole content library is being built and built over the years as it amasses the quantity within. So those are a few reasons. Later on, we can talk more about the instructors and why I really love it, and what was different about it that drew me to invest. But that’s mainly from a general point of view.

Reggie: Okay. So can you give us a little bit of color? What is the bulk of revenue coming from these bikes? And you did vividly say that 50% of the people that bought the bikes are buying on the installment plan. 

Max: Yes. 

Reggie: So that is the longer term cashflow. 

Max: Yeah. So actually the bulk of revenue from their company right now, close to 80% of their revenue came from the bikes – because I mentioned there’s two revenue streams – bikes versus subscription monthly. So as of now full company revenue, 80% comes from bikes, the latest quarter though, it dropped to 60%, for reasons we can get into later. But I think that’s an anomaly due to some difficulties or headwinds they’re facing, but before that, generally they were about 70% to 80% across the board that makes up their full year revenue coming from the hardware.

So it’s not just the bikes by the way, it’s the bikes plus the treadmills, but the bikes is the main, the main moneymaker now; because the treadmill is still a bit new and it’s not yet penetrated that well yet in the market. Yeah. 

Reggie: And there’s some problems with the treadmill. 

Max: Yes exactly. 

Reggie: That’s what I heard. By the way, guys, I just want to slot here that there’s a rooster outside my house. So if you’re hear *rooster noises*, don’t mind me. I’m in some [inaudible] region.

Max: I can’t hear though.

Reggie: That’s great. That’s good stuff. Okay. So about 80% comes from the bikes and the treadmill, which for now is still problematic. We can talk a little bit about it. And the remaining, I would assume, comes from the monthly subscription.

Max: Yes. Correct. It’s subscription revenue is the balance. 

Reggie: Yep. Okay. So when we look at a business like this, we want to see the hardware sales continue to stay strong, and also the monthly subscription will then grow along with the hardware sales, right? Something on this line. 

Max: Got it. So let me just chime in there – maybe yes and no. So there’s a few different trains of thought/schools of thought, I can share mine as well. So obviously because they are hardware companies… so traditionally for hardware company, investors or growth investors, most will not really look at it, because we are all into that software and in the cloud kind of stuff.

But the reason it was exciting was because of their growth rate for hardware, like growing like a hundred percent year on year before all this difficulties came in, before that [it was] growing quite fast. And so the thesis that a lot of investors have is actually the hardware, even though it’s the majority, it’s a bit like what you said – you want the subscription to follow along, but eventually be able to increase in percentage as well.

Because the truth is, your bike is only a one-time payment, but your subscription goes on for a long time and we can get into the subscription later on as well, if you want to probe. But the subscription, their churn is actually pretty attractive, in a sense where the stickiness is very awesome for a consumer product.

So their churn is about 0.8%, 0.7%, hovers around there per month. So if you just make it to like, maybe in one year, like maybe like about 90% retention, which for a consumer product, I would say it’s pretty off the charts. So what a lot of investors, at least the long-term bulls like myself included back then, is the main thesis was okay…

Reggie: Back then… *laughs*

Max: As in… I’ll share that later. And that is, you want the hardware to continue growing, but you want to see the software kind of increase in proportion because the LT or the long-term value of one single customer that you bring in can be pretty long, because of the highest stickiness or sticky retention rates.

Reggie: Okay. Fair. I hear you on this. And are you, are they looking to do a similar walled garden kind of strategy, where the software and all the content is only tied to Peloton bikes. 

Max: It’s been a wallled garden forever, which is what… 

Reggie: Forever ah, so they don’t plan to open it up and connect with other…

Max: No. And from their strategy you can see it’s obvious also, they are trying to build another kind of aspirational brand. So the wall garden strategy is quite common. 

Reggie: Okay, cool. So let’s expand a little bit on the subscription then. Why do you think it’s like so amazing? Based on what you are saying, it’s oh, this is very good, blah, blah, blah. I want to hear a little bit on that. 

Max: So I think I’ll share the numbers and then afterwards I’ll share the qualitative as well. So the numbers, don’t know whether the listeners can follow along with me just throwing out numbers, but by the way I’m looking at a spreadsheet. So it’s not coming from my head also, so it’s a lot easier for me. It’s actually… it’s my own financial modeling, right?

It’s about 0.8% per month. This is the monthly net churn – 0.8 to 0.7% per month. Of course, there are some months it dropped to 0.3%, 0.4%, but just assumed 0.8% 0.7%. So if you analyze that to a year, it means in one year they have an 88% or like a close to 90% retention rate.

So based off that, it means that if you look at the lifetime of a customer, assuming these numbers continue to hold, it would give you like a lifetime of close to a hundred months, about eight years, which sounds borderline ridiculous because we can’t envision that. I can’t imagine someone paying 8 years subscription non-stop for Peloton, but at least the numbers, if you want to use that, the numbers don’t lie.

So based off this from that point of view, and then you times a $39 per month, times 12 months for one year, and times like eight years, whatever, that amount in terms of the lifetime value, it’s I think – I did the math – I don’t have calculator with me right now, but it’s about $2,000 plus versus their amount of sales and marketing spend, which is what we call the CAC, the customer acquisition cost. The sales and marketing spend to bring a subscriber, it’s at least right now, at max, about $100 plus, previously was about $200 plus, but even if you assume the previously $200 plus, the CAC of $250 versus a $2,000 long-term value, and I think the numbers speak for itself in terms of the multiple from LTV to CAC.

So that’s why a lot of investors actually see that Peloton, or the bullish investors: Peloton is actually a hardware company, but behind that mask is actually a media subscription company. That’s why a lot of references, I’m not sure whether maybe Reggie, you have maybe heard about it – a lot of references were drawn to Netflix as well.

Because of that, the best that I know, that’s bulls***. How can you compare this with Netflix? But actually there is a lot of I would say similarities, if you only use a proxy for Netflix because of their subscription and the numbers making sense because of their stickiness. 

Reggie: Even Netflix itself says that it’s not just about video consumption.

They are competing with gaming, they’re competing with news. They are competing with all the… because it’s about attention, right? So if people spend a lot of time on Peloton, then in some ways they are competitor, but I’m not sure if the day-to-day human things like that “Oh yeah, I’m going to replace Netflix with Peloton.” I’m not sure about that. So, but I hear you and for a lot of people listening in, customer acquisition costs essentially is the cost to acquire the customer to come into the ecosystem and sign up and then LTVs are the assumed total amount that you can squeeze out of them over their lifetime with you as a customer.

But I have a question on this: because I think certain businesses, LTV actualization is very high, in a sense because they have time to prove out that, okay. Yes, people do stay around, it really works, but this is a lot of assumption. Peloton is a young company and there’s a very big problem in this assumption is fitness trends.

So fitness has trends, right? Like bar exercises, like yoga, like all those things. They have cycles, but eventually they fade out and then there’ll be new things then come in. Are you then concerned that the assumption in the LTV is overly optimized? 

Max: Yes. A solid point. I would say yes, I was concerned at first, before I took a position that it is like… I mean, even though the numbers show that it’s eight years long term, lifetime value. But is that really possible? Even, I can’t imagine myself riding a spinning bike for 8 years nonstop, [I] probably getting bored. But then of course, then I started doing my own due diligence.

So because if the numbers show you that, then you wanna maybe the deeper to try and disprove the number. So what I did was I went to research, and the good thing about these consumer businesses like Peloton is that you can really research because there are people posting their Facebook, YouTube, Reddit reviews, what have you.

Peloton actually has a free Facebook group online for their Peloton members. It’s a few hundred thousand people inside, and so I joined that group to kind of spy. I joined their Reddit or their subreddit, Peloton subreddit. And so this was the part that made me excited to kind of answer your question on that point, was because actually when you look at it, there are people – and it’s not just one, it’s multiple people – who have owned their Peloton for three years, four years coming, which even though it’s not eight years, it’s still pretty insane; and these are not just… they are not anomalies. It’s actually quite common. And how do we know this? Because they will post their workout photo on the Facebook group and like: “Hey, it’s been four years, blah, blah, blah. This thing has helped me fight cancer or other kinds of stuff.” And then in the subreddit also you will have people who share their experiences with the newbies who just came in about, “Oh, I’ve been here for three years, four years.”

And when I went to dig deeper in terms of a lot of reviews, WordPress sites, actually Peloton, even though it’s a young company, because it only was a listed IPO in 2019, late 2019. Butit tracked back all the way to… it started selling bikes pretty well in, I would say, 2015/2016 about there, I might be off by a bit, but it’s been some time. And so people actually do constantly stick to it. So seeing a few – of course, all these are anecdotal to be fair, because you can’t really do a survey. But I saw a lot of multiple occurrences of people who actually stuck to the thing for a long time. So that kind of made me feel a bit more assured. 

And then when I dug deeper into what makes the people stick. So I think that’s where I forgot to answer the question just now, as to your question about the LTV, and that is, from a qualitative side, put the numbers aside – the reason Peloton is so sticky, which until now they still are, is because of one thing. It’s the instructors and their classes.

So I just give you an example from a fitness point of view: I’m sure most of us in our lives, Reggie yourself, myself included, in our lives – at least once in our life, we have wanted to lose weight, correct? We all have tried that. 

Reggie: Recurring theme la, Not once in a life la, just saying. 

Max: Okay. Got it. So the problem with losing weight or getting fit is what? It’s always a means to an end, right? You follow, like in a sense where people go for the workout not because they like to work out, but because it’s a terrible experience, but they just go through that so that you can hit that nice weight, that nice body, that healthier life that you crave or you desire.

So it’s always a means to an end. But when I was looking through a lot of these Peloton reviews on YouTube, Facebook, Reddit, all these stuff, the Peloton experience is an end in itself. So people go for the bike because it’s fun. It’s fun, and it’s energizing. 

And I went to see a few of the classes on YouTube… so once again, it’s purely walled garden, it’s only [because] some people they just record snippets of their class and they put online – it’s pretty much like going to… I use a an example, which – just ask me to explain more if you can’t really get it. It’s a combination of a fitness class, plus a dance club, plus a motivational seminar, plus church and plus a theater play all in one.

Like I give you an example: they have a lot of different types of personalities in their instructor team. You have a very… this guy name is named Cody Rigsby, he’s like a sassy guy, very fun guy, always talking about him being gay and very open about it. And then the ladies just love him. He talks in a very sassy manner, a bit like if you have watched… what’s that movie… about some white chick or something like a character out from that movie. And he attracts a lot of the females and the ladies and then everytime on the bike, as you imagine, you’re exercising, you’re very tired; he’s talking about him and his boyfriend going out on a hot date and all sorts of funny stuff. And so you’re laughing and getting entertained while sweating.

And then plus they use a lot of music. So they have lot of tie-ups, which is a big part of their spend. Partnerships with like Beyonce, they have Michael Jackson rights, Brittany Spears rights, andof course they were ‘zhng’ the thing a bit to have their *dubstep noises*, like a bit of a different feel.

So it’s a mixture of dance club, all these things add together. And then of course, along the way, they would tell you some motivational quotes like, “Okay guys, as you’re tired, remember why you started” all these kinds of very dry examples. And then plus because of the… yes, because of the nature of the business model, like example sometimes when… and if you guys have time, you can check out the Facebook group. Some – this is very common by the way – somebodies mother died in a fire, somebody’s kid died because of an accident, very sad example. They would post all these photos of their kids on the Peloton Facebook group, that free Facebook group; and that Facebook group is moderated by I think a ton of their own moderators looking through. And if they see this coming from a member, they will likely search the member’s name, and then check this member book what live class next tomorrow, and then they see who’s the instructor, and they will find all these very strong highlights that can really be very memorable.

They will tell the instructor “Hey, today/yesterday Jenny posted on the Facebook group, her mom just died. I want you to do a shoutout for her.” So their whole class is all scripted and very theater-like, which people don’t know. It’s not just a gym class where… 

Reggie: Of course.

Max: Oh, live gyms, people just… it’s all like spontaneous. So it’s all planned. And so the instructor will have like, at the 39th minute when this track from Michael Jackson plays, I’m going to say, “Hey Jennifer, just wanted to give a shoutout. I know it’s tough for you, but ride on, we are all with you.” And then you can see people, they post “Oh my goodness, the instructor call me out today, and I just cried while riding.”

So I hope this gives you the essence of like… Yeah, it’s church motivational seminar, dance club, fitness class, all tied up in one. To answer the question – I gave a very long winded answer – as to why the stickiness is there. So because of those factors, it allowed me to feel a bit more assured… I wouldn’t say I’m confident they can last eight years, but I’m more assured that the churn is what it says on numbers.

Reggie: Interesting. Very cultish, very spiritual…

Max: Oh yes! That’s a good word.

Reggie: I’m not saying that it’s definitely a bad thing, but it’s just… the very essence of a cult, right? But in a business view, it’s not bad. We put our morality aside, just looking at the churn in itself.

But I would say for all of you listening, maybe you still got to see for a little bit longer. But Okay, if the clarity comes along, then prices will reflect in itself already. So maybe you will not be as advanced. But the reality is: I do think churn rate will increase exponentially in the later part of their life cycle as a customer. More people will drop off.

Max: It’s a fair point. 

Reggie: Yeah. That’s very standard, I would say. But also one thing about their content spend. They do spend the highest relative to all the other guys, Spotify, Netflix, YouTube, Apple, everybody. They do spend the highest per stream. So they do pay content creators the most. I’m not sure how that will play out.

Do you have any, do you have any thoughts on that? 

Max: Yeah, have. So actually this people see as a downside. I actually like that. So you mentioned… cause you mentioned their competitors, Netflix,Spotify, but actually I wouldn’t say those are competitors because those are like totally different business model, right?

Their main competitors in this industry…

Reggie: But they buy from the same creators right? 

Max: So they have like… in some ways, but of course they have licensing agreements and partnerships with like Spotify as well. So it’s not exactly a competitor. So their main competitors are a few bike companies, known as NordicTrack, Echelon Bikes.

All these are like different variations, then of course, Apple Fitness, also apples as we go in today. The main reason if we’re going to look at the Instagram pages of the companies, and so all these companies also have their own instructors, like the reason the fan following, like you said a very good word – which is the cult-like following that Peloton instructors have, which is actually their main moat, because that’s what customers go back for because of the personality and the connection of the instructors versus instructors from Echelon, Nordic or Apple Fitness; it’s mainly because of the content spend. 

So Peloton spends a lot of money on hiring the best people to make their content. They spend a lot of money on music licensing, which is a very big bulk of their content versus a typical class from a competitor that just uses some random Tom Dick Harry chapalang [random/mixed] music. And then the thing that I think I was quite impressed by, which of course is what you mentioned, that it’s content – is it a concern?

Yes. But I was quite impressed by… when I was doing a bit digging, and actually people… this one I think they are not supposed to say, but always there’s always a back door person who will come out and share… Peloton, almost every class is purely scripted from start to finish, which is when I first heard it, I was like, “whoa, that’s pretty insane”. 

Because like you mentioned, there’s some ethical concerns there as well, but I see it as like it’s just theater and so it’s scripted start to finish; and they hire Hollywood producers or people from Hollywood to script their classes. So their stuff like the… are you aware of this thing known as the hero’s journey, where like, in storytelling, the hero goes through the arc, they do the same thing. So even though the class, you might think, “oh, it’s just a spin class”, suddenly go inside. Actually, there’s a lot of scripting that goes in to make you go through the ups and downs, the highs, feel the inspiration; at the bare low where you feel damn tired, kinda push you a bit.

And so all these content spend add up, but to me, I want to see that; because otherwise, then they’re not going to be any different from the competitors what, isn’t it? Anyone can just get a bike, an iPad, and an instructor. What makes them different? It’s this spend and their partnerships that they have built over time.

Reggie: Okay. Okay. So then I think the next important question about this particular thing is: how long do they have absolute exclusivity to all these trainers? This is important, right? 

Max: Yeah. So obviously this one: even I don’t have the perfect answer to be fair, which is why their spend on music is actually one of their highest spend – their spend with this Beyonce, Michael Jackson, Britney Spears is one of the highest spend.

So that’s why I think the market is constant, yeah. 

Reggie: Are they then able to successfully keep creating new personalities – like new cultures, new… That’s important.

Max: Yes. Bingo. So that actually is one of the… so my investing philosophy is normally when I want to invest in a company, I’ll break the company down into three key variables or 3 to 4 dependent on how many I can find, to try and track the company for.

So you actually nailed a very solid point, Reggie. One of the variables I look for is: its ability to churn out stars. Celebrities are stars, because like I mentioned, because we mentioned – if the moat that the company has is the connection that people have with these personas on the bikes, which is the instructors, then if this instructor leaves, then they are screwed lah, they’re really screwed. 

So I want to see the ability to churn out stars, which means just from what I just said, those people that really understand this, which is not easy to understand: Actually Peloton is not even a hardware company. It’s a media company. It’s like a under the radar Hollywood kinda… it just needs to be able to churn out your Robert Downey Jr, your actors, actresses, what have you, Johnny Depp’s; and so that was my initial concern that I have – they just have a few, one or two stars lined up, but over the last few years, they have churned out a few new stars. And if you follow the Instagram page, the following on a like a week to week or month on month basis, it’s actually picking up trend in an accelerated manner as well.

So the ability to build up the persona of these instructors to become like celebrities is actually there. So initially the early days was just a few instructors, a few of them, their names are Cody Rigsby, Ellie Love, a few of these people. Today they have so many more from different countries as well. So it tells me that they have their system there. And of course, I went to do a bit of digging on Twitter, speaking to a few other investors and a few other on the ground researchers as well of the company. Their process for building up the instructors is actually pretty insane. So it’s a very high bar.

When the instructors first come in… so what they will do right, is they will send out certain talent scouts to go attend spin classes from Orange Theory and Soulcycle. Really. And then they will track these people. One of their instructors, his name is called Ben Alldis, came from this way where one of their talent scouts went down to his class. The guy was giving you a fitness class, one of the boutique gyms, after the class, and he [was] just approached you and “Hey, would you be interested in having a different type of arrangement for fitness that could really change your life?” Something like this, just…

Reggie: Very K-pop. 

Max: Hired the guy from there, and then through that, they go through like a six month probation period. Also a training period, which is pretty intense. And then afterwards, a lot of their instructors – the part that gave me a lot of excitement, so I think I’m going to be overly bullish through my sharing – is that it’s like they don’t come from instructor backgrounds, a lot of the instructors… just now I give the example was a bit of an anomaly. Quite a number of their instructors come from backgrounds with zero fitness experience. So a few of their best instructors right now are dancers, lawyers. So they like to hire people with a certain stage personality who already have the ability to what we call rah rah a crowd because the training or the fitness part can teach.

Reggie: I get it. And I love how lawyers are part of the rah rah… anyway, that’s a discussion for another time. But yes, I think that’s an important thing for listeners to take note because as with many other sectors that are, very anchored on celebrities, anchored on personalities, like livestream, selling stuff, or even like K-pop directly, you really got to see how well the company can keep churning new people.

And if they cannot then yeah, it’s a little bit of a issue because they get tied down by the personalities. 

Max: Correct. 

Reggie: Yeah. And I think through the pandemic, everybody assume, or everybody tie Peloton as a pandemic play. Because for the past two years, you see revenue fly, hundreds of percent moving up in itself. What is the play then going forward post pandemic? Are you expecting them to slow down or… and I also see across profit, like dwindling right? So… 

Max: Yeah, revenue slowing down. So this one, I think I’ll be very upfront as well:

I don’t have, I’m still struggling to find the answer, which is why I exited. Maybe we can gradually move into that side of it. So generally… so I’ll share the before [and] after… before I exited, before I exited through my own research, because it’s like, is this a COVID stop? This is a COVID play.

We’re very concerned. And then through a lot of the analyst calls that the management team does, with these analysts from like Bank of America or what have you, or are these conferences and in their quarterly earnings as well, they actually share their stats; and also in their earnings presentation.

Throughout the last few years of people who… of all the total Peloton users currently that they had back then that they surveyed, four out of five did not come from a gym. You get my point? So initially my take was, if this is a COVID stop, it means that people, because they cannot go to the gym, then they buy the bike to use as a what we call a substitute for people who are already in the fitness market.

But four out of five of their current users did not come from a gym. And majority of their users are not in the market for fitness equipment, which means how did they come across it? It’s really through word of mouth and this one have to give it to them. Their word of mouth is really solid and strong, there’s a lot of pull factor rather than push on advertising, even though they’re starting to ramp up their advertising engine already, but a lot of pool factor from the consumer to consumer. And so because of that when I look at those factors, I’m like, okay, and during the pandemic itself, they actually didn’t spend much on marketing. They actually openly say, if you see the spend on sales and marketing, previously pre-pandemic was like 20 plus percent, during pandemic it dropped to 12, 13%.

You might think it’s a bit silly, because pandemic they should be capitalizing. But there’s one reason they didn’t do that. And it’s unfortunate – it’s because they didn’t expect the pandemic to happen. Nobody saw that. So their supply chain cannot cope. So because the supply chain cannot cope, they didn’t want to rev the marketing engine. So they held back, so mainly came from word of mouth. So it was because of those factors that made me realize… the past is still the past that, oh I don’t think they are a COVID play, but then now moving on to the present or the current, or like the latest quarter, the reason the stock fell like 40% in a week or something like that, is because of the management team in the earnings call for the first time, they showed a lot of weakness – previously most earnings calls they’re normally quite confident – there’s always a few hiccups here or there, but generally very confident. 

[But this time] They show a lot of uncertainty. John Foley who’s the CEO mentioned that: they actually overestimated the recovery, overestimate demand after the recovery of the pandemic. So right now, since places are opening up, they overestimate more foot traffic into their stores that they sell the Peloton from. So it’s similar to Apple and Tesla, they have their own stores. They don’t sell through third party distributors, also their own stores. They overestimate the foot traffic. They also overestimated site traffic. So they didn’t expect it to drop so much, but it dropped by more than they expected. So because of that, this is obviously COVID happening again.

And of course, because of summer, because the US summer time is from May all the way till around like the spring which is October period ending December. Because of those factors, that’s why the revenue took a hit and that’s why they guided for such a terrible guidance, and that’s why the whole stock came down because of the poor revenue expectations. 

So to answer your question, I don’t have the perfect answer. Previously, I was quite confident because of what they said, but in the recent quarter, they also sounded uncertain of moving forward; whether there’s actually a lot of COVID tail winds pushing it up.

So my perspective is: because of the strong customer love for the product, I still think they’ll be around for a long time; but I would say COVID did play a role in pushing them up or giving them a strong advantage during that, and can they maintain that? As of now it looks like likely not. 

Reggie: Okay. Why do you think ‘likely not’?

Max: Okay. So it’s a… I see it as often now, which means because of the the recent stuff that happened. And so maybe you can get into why I exited, a few reasons: so number one is because they, I can mention… they already mentioned, or like John Foley mentioned that they overestimated the demand.

That’s number one. Secondly, and this is something more towards the execution wise, they are supposed to… so it’s always been on their cards to… like they keep saying that 2021, which is your financial year 2022, which is right now 2021, as their financial year is normally like a few months in advance of the actual year, it’s the year for the threat. And then we get into the threat… what I’ve heard is because of the accident with the toddler getting… there’s a toddler they actually got killed because of a treadmill. They had to pull back the tread, recall and do a few things. But even after that, they’re supposed to roll up the tread and the have, they have rolled out the tread.

It’s not taking place at the speed that it’s supposed to, or the said that it would. And I… granted I get it, companies, they have speed bumps on the road. They have hiccups. I get it, we’re supposed to zoom out a little bit. But just with this alone, it’s very strong in the execution. And then they are supposed to have, or at least in the cards, a few other hardware that they plan to roll out.

It’s all pretty slow in terms of innovation. The reason I say why I’m a bit unconfident is because even if let’s say the fitness trends continue, let’s say this demand still continues, but their ability to roll it out makes me feel uncertain. And so that’s why I have weakness in my position.

Reggie: Okay. So how will you then rate management? Sounds like there are a lot of management problems at this point in time. 

Max: Yeah. So you’re making me come to terms… shooting myself also right. I really love the founder. His name is called John Foley, because part of my investment research process, or my own style is before I invest in a company, I will spend like at least a few weeks watching all the interviews on YouTube, Spotify interviews, podcasts to understand this business. Correct, so this guy is a, he’s a fighter… to give some context, when he first launched Peloton, people didn’t believe because it’s just “Who the heck would buy hardware on a bike?” Every VC back then wanted to fund stuff around software.

So he went through, I think if I’m not wrong, it could be… is it hundreds or thousands of rejections before he got his first VC funding, whatever. So this guy is a fighter who really believed in the mission. So I love him for everything that I’ve researched on him so far. 

But as of late the execution as a team.. So I wouldn’t really know whether you can grant it it’s his fault exactly. But I would say yes because as the CEO, I would still put you responsible. That is, the ability to innovate and to execute these things are not there. And the part that I think I was quite disappointed to be fair was on the earnings call, the latest call which is just last month. And analysts actually asked them, say, “Hey, given that you guys are lowering the prices of your bike in order to sell more, and so your gross margins are coming down. Do you likely need to raise more money to fund your business,” because you mentioned they have a high expenditure on music and content. And they said “No, actually as of the cash balances that we have and the revolving loans that we have from the banks… Revolving credit that we have, the credit faculty, we are good. We don’t need.” 

And then like what the hell? One week after the earnings call, you raise capital. So in the earnings call is, “we don’t need, and we don’t foresee a capital raise” and they did that. So I get it if the company needs cash, but when you sound so certain that you don’t need, and then one week later you do 180 on us as investors, you cause the question… maybe not integrity, because I think this guy is quite… really he’s for the business, but it just tells me, you are… even you yourself are not sure of the needs for your own business. What more me as an investor? 

Reggie: Yes. And this reminds me of Kevin Plank from Under Armour. So it’s the same situation, right? Like when the, when they rode and rode, they flew, they were everywhere. And then they grew and grew every quarter 20-over percent growth. And they hit a ball, they hit a very very bad situation where they over indented, they had supply chain problems after that, and they couldn’t shed their stock. And, in terms of all the stuff, so inventory problem, and they just spiral to where it is today.

So do you think it’s a situation where the team doesn’t have enough talent in a sense of like operation? Because managing supply chain is very complicated. That’s one thing. And Under Armour, at that point in time, they didn’t have someone that is very good with operations. What are your thoughts on this part, like beyond just the founder? 

Max: I would say yes, to answer your question. And that’s because if I look at… so same thing, I can’t look at a future, having looked at the track record. Even though yeah, that management, this CEO is someone that I love for his grit and his resilience. But first of all, during COVID… now, granted, I know nobody saw COVID coming. But the supply chain issues was a mess, it was a complete mess. So you give some context. Typically what we call the OTD [on-time delivery window] – it’s a term in the manufacturing industry for these kinds of supply chains. Their previous OTD for the bikes before COVID was just maybe like 1-3 weeks, about there.

During COVID it went up to as high as two months or even three months in certain crazy periods, or in certain states where it’s a bit harder for the third-party logistics or for their own vans to reach because of supply chain. So it became like, which is why like I mentioned just now, they couldn’t ramp up marketing because of fulfillment issues. So that’s Number one, they had to spend hundred… 

Reggie: A question on this. Did they increase their spend? Excuse me. Did they increase their spend to try to get this going, reduce their margin during this period of time? 

Max: Correct. I was going to go there, yeah, they spend hundred million dollars in order to expedite the shipping via air freight because most of their bikes came from this factory in Taiwan. It’s from Xinji, Taiwan… this factory known as Tonic Plant. Anyway, long story short, the bikes normally come from Taiwan. So because of this I think it comes by another method, maybe boat or whatever, but because of this, they spent a hundred million, which you are right – it ate into their margins. And so because of this, their margins took a hit: operating margin, gross margin all took a hit.

And so because of this, it tells me that wow, a hundred minutes is a lot, quite a fair bit, I think, to spend on supply chain. So that’s during the pandemic, but investors were all closing one eye, myself included, because the revenue was still growing like bonkers. So that’s a supply chain issue they face already and, but of course, to be fair to them, a lot of the other competitors that I listened to the interviews of those companies CEOs who are also in the connected fitness business, all face supply chain issues.

So granted, mainly, I want to be fair there. But right now also, you have another issue regarding execution of these products rolling out of these treads, what have you, that’s the second time these supply chains are coming up again. So maybe, could you say “oh, but it’s because of the accident, because of the baby died at the treadmill and we had to recall and then the approval from the authorities is taking longer than expected” – yeah, maybe, but I think from an investing point of view, where I placed my money is important; when I see stuff like that, recurring theme is execution around supply chain. To answer your question it’s yes, I think they may lack good supply chain operational strategists or executives on their team and that should be what they are trying to solve. But yeah, I don’t have the best answers to how they’re going to do it yet as of now. 

Reggie: Fair. So I think we hear a lot of challenges coming up, with supply chain and also with the changing consumer habits going forward, because like pandemic… it’s kinda post pandemic in a lot of places… in SIngapore still, you know like… but in a lot of places, it’s already post-pandemic, so you want to see the consumer habits, how do they develop over time. So maybe in the last Things that you can share with us: Give us some concrete idea, what are some of the risk factors and why did you then decide to ‘leave’ the company? Because, you know, let’s take a break from this. 

Max: Ties in nicely, because I left it obviously because of risk factors, actually I kinda covered most of them really, but I think to give a quick background as to why I left, so I would not have exited the position if not for my style of portfolio allocation. 

So just a quick background, even though it may not be a part of this podcast, I have a pretty concentrated portfolio. How concentrated, I’m talking about eight, seven to eight stocks, but the top four can take up like 80, 90% of it. So because of that, and Peloton was one of those concentrated positions; if today I have a diversified portfolio of maybe like Peter Lynch, what have you, like few hundred or maybe even like 50-60, I can afford to let it stay there. And if you ask me, I think I would let it stay there because I still believe. If I ask myself… fundamentally, Buffett saying back then the American Express and the oil scandal… fundamentally, did anything change in the business?

Okay, execution wise, yes. The execution got problem. But is the product love still strong? Yes. Is the customer still using the product at the same rate? Yes. Even though, there’s seasonality from summer to winter, but yes, there is no anger or poor customer service, whatever, it’s still the same level of customer raving, cult-like fan level of excitement for that.

So it’s still there. So if I have a more diversified portfolio, I would have left it there because I really believe in the long run, but long run, who knows how many years, it will still go back and eventually, still continue to grow. But the problem was that because of my concentration I don’t know how long it’s going to be stuck there.

And when I consider opportunity costs, right? Hey, I can put my money at other companies that have a lot more confidence, I have a lot more clarity on the management execution and direction for the next few years, why would I want to keep the money there? So that’s where I took the loss. And that’s quite a heavy loss for me.

But from a whole portfolio, it’s still fine. And so I think to answer your question from a more management level, a few things… number one, Three reasons why I left: number one, as a management team, if you yourself are telling me that you don’t have an idea of your forecast for your website traffic, on your store traffic for the next coming months – which they openly said – then what more me as an investor? I can do as a [inaudible] right, but even you yourself are not clear, how will I be clear? So that was a big red flag for me. 

Number two, you did a capital raise where you said you didn’t. So put the execution stuff aside, even your own financial situation – you’re not clear, man. You get my point right? Like you did a… Once again, I say it’s okay to do a capital raise, but when you say you don’t need and you do it one week later, “Eh, there’s a problem there, man”. 

But the day after they released the earnings, I think the timed this also lah, they released a report and I think this one got leaked openly to the public, but I think they knew that it was going to get leaked anyway. They have temporarily stopped all hiring. They have stopped all hiring across the board for their company because of the fact that expenses are increasing, they spend a lot of expenses. They overexpanded during COVID. And like I mentioned, this ties into my first point as to how they over estimated demand.

So they’re a bit bloated right now, they’re trying to cut costs. So from my perspective is just one thing – this is very clear already – this is not what a growth company, at least in a medium term, should look like. Once again in the long term, can they grow? I would say yes, because I still love the company.

But same thing, if it just you’re cutting costs, this is not what a growth company looks like. And for my style of investing, if the revenue doesn’t grow, the price will not move – or even though I don’t want to talk about price here, because you want to think long-term – But simply my money will be a big opportunity cost there.

So it’s for those three reasons that my lack of belief and faith in the management team now that I am exiting the position and those are the risks: It’s mainly the management, and of course the ability to understand their business and do the operational stuff. Yep. 

Reggie: I hear you. And I foresee more cash, more capital raising from the company, just from the financials.

Max: Yes. I foresee this.

Reggie: I see the financials, like 不可能 [cannot make it], their cashflow is problematic at this point in time, their cash position is not rich. They have some space for debt, because their debt positions are not high, but they are really starting to raise that. So to continue to move, they will have to raise more equity.

So I think for all you listening, very likely you will see more dillusion. So if you’re interested in the company, you can wait a little longer. 

Max: Yeah. Correct. Correct. You actually nailed all the points I had in mind. Yep. 

Reggie: Great, cool. Yeah. So I think. We had a great discussion from the whole thought process as to why you bought it, all the way to why you sell it.

I think this is a great discussion, to try to get people to see this whole part of okay, as an investor, I, because of my style, I decided to drop it because of blah, blah, blah. It does not mean the company inherently is not a good company. But that also doesn’t mean that it is not facing a lot of problems in the medium term, at least.

Max: Can I try me something regarding like portfolio education? Just because I think it’s very crucial, because it’s quite a raw wound I’m still facing, at the upside at the point that you made about… yeah so in the medium short term, they are going to raise more capital. Your price is going to get worse because of the dilution.

And so I think the fortunate thing for me was that even though, yes, I took a big hit on this, my full portfolio amount that I lost was just like 4%. And I’m going to give some context to why I’m mentioning this. So thankfully for position sizing, I’m still able to have the courage needed to exit. But because I think, Twitter, there’s a lot of Peloton bulls.

I’m actually in touch with some of them. We DM each other. I know people who are in Peloton, one stock all in, and so they are down… I don’t want to go so much into the details as to who they are, but they’re down close to a million and you just think for a second, when you’re down a million in a stock, unless maybe you have a lot of nerves of steel. There is no way you’re going to say, “let me just exit and redeploy”. No way, when you’re down a million. 

And so my point was that: I think the lesson here, if whoever’s listening, is that even if you like the company – may not be Peloton – or you don’t like the company, whatever, or… I mean, if youlike the company, I think the sizing is still so crucial no matter how bullish and I think that’s something I’m also very fortunate to still stick to the discipline with in some way, because if I had gone all in on that I would not even have the mood to be doing this podcast with you today. So it is an important lesson to take, beyond just the company.

Yeah. Sorry to cut you off. 

Reggie: No. Great. I think that’s a good discussion and we should probably continue the discussion in portfolio education in our other segment on Chills with TFC, I will get the editorial team to contact you. So yes, thank you for coming in with us. And I hope to see you again, with another company maybe slightly down the road. Okay… 

Max: Thank you Reggie, for having me. Thank you. 

Reggie: Awesome, bye. 

Max: Thank you. Bye-bye.