Screw it, I’m investing in Peloton

When I was 25 I invested in GoPro—which at the time, believe it or not, was a hot company. They IPOed that summer at $35, had an incredible run-up to $87 that fall, and then cooled off to the mid $50s that winter. A friend of mine loved GoPro, and infected me with this narrative that their hardware could avoid commoditization through content and community. So I decided to get in while the getting was good.

Turns out, a lot of times when you think you’re being greedy when others are fearful, you’re actually just being dumb when others are smart.

I bought GoPro at $52 per share, and pretty much instantly regretted it. As I watched the money leave my bank account I realized I didn’t know anything about their business, I didn’t own one of their cameras (hadn’t even used one, honestly), and the only reason I bought the stock was because a random friend liked their surfing videos. Call it “post investment clarity.”

Over the next few weeks, my investment kept shrinking. Of course it did. I didn’t want to sell for a loss, but had no faith it would rebound. I was paralyzed and avoided thinking about it, like a stack of dirty dishes, which only made the problem worse.

Then, a miracle: the stock bounced back to $52—no idea why—and I was able to sell for a small profit. I was free.

Shortly thereafter, GoPro crashed for good.

So what does this harrowing tale have to do with Peloton, you might be wondering? 

Well, I’m now older and theoretically wiser, but I just bought the dip of a consumer hardware company on the theory that content and community can provide it a bulwark against commoditization.

But screw it, this time could be different!

Why I Bought $PTON

I think of Peloton as something like an angel investment—but liquid from day one, and with limited downside. Despite the fact that they are a public company with billions in revenue, an investment today is basically a “team and dream” bet. Peloton is embarking on a new journey led by a new CEO that promises to fundamentally reshape the company.

At the highest level, this is what’s happening:

• The revenue is moving from one-off hardware sales to recurring subscriptions
• The content is moving from in-house only to a more open platform (I wrote in detail about this last month)
• The fitness modality is expanding beyond spinning to all types of workouts
• The capital investment strategy is moving from mostly hardware-focused to mostly software- and content-focused

It’s a high stakes bet that will affect millions of Peloton users and determine the future of one of the largest and most interesting companies in fitness.

If you think it has a decent shot at working, as I do (we’ll go over why I feel this way in the next section), then now is probably a good time to make the bet. Thanks largely to their recent troubles and partially to an uncertain macro environment, Peloton is pretty damn cheap right now. Their current market value is $8.8 billion, but they had $4.1 billion in revenue in the past 12 months (a mere 2x multiple) and $1.2 billion in gross profit (7x multiple). It gets better. Their current valuation is just a 6.5x multiple of annualized subscription revenue alone. This is way out of range of most comparable growth-stage subscription businesses.

But just because a stock seems cheap doesn't mean it’s actually a good buy. (See GoPro above.) What interests me most about Peloton is their new strategy. 

I first started sniffing around Peloton when they fired their CEO last month and hired a new one, Barry McCarthy, who previously was the CFO at Spotify and Netflix. I wrote an essay unpacking what I thought they would do based on what McCarthy was saying in interviews at the time. I wasn’t sure if it would work or not, I just wanted to understand it.

Since then, a few interesting things have happened:

1. The stock kept getting cheaper
2. They started to roll out pricing experiments they previously had only hinted at
3. Some big equities analysts issued bullish forecasts
4. The stock started climbing

This is all short term stuff. Nothing here should fundamentally change our view of what the company is capable of doing. But it did increase my confidence that McCarthy is really going to do what he said he was going to do, and it helped that people smarter than me—or who at least have much larger spreadsheets than me—also think this is a good bet. So I decided to pull the trigger.

I got in at $22.51 per share on March 15th, and bought an amount that is reasonably responsible, but still made me a little nervous. Since then I’ve earned a 22% return, which is not bad, but it doesn’t ultimately mean anything. This is a long term bet, and if the stock had gone down by 22% in the first week I wouldn’t have concluded anything meaningful from it, so I shouldn’t do the opposite just because the result happens to be in my favor.