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IPO Update: Peloton Interactive Readies U.S. IPO

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About: Peloton Interactive (PTON), Includes: BC, NLS
by: Donovan Jones
Summary

Peloton Interactive has filed to raise $1.1 billion in a U.S. IPO.

The firm sells equipment and software subscriptions to fitness enthusiasts.

PTON has grown revenue rapidly with strong gross margin but is burning cash as it seeks greater scale to execute its direct-to-consumer business model.

For investors with a patient and long-term time horizon, the IPO could be a compelling opportunity.

Quick Take

Peloton Interactive (PTON) has filed to raise $1.1 billion in an IPO of its Class A common stock, according to an S-1/A registration statement.

The company sells fitness equipment and related software subscription services to fitness enthusiasts.

PTON is growing impressively and needs additional time and scale to achieve management’s vision of a more expansive operation.

Company & Technology

New York-based Peloton was founded in 2012 to develop and market fitness bikes and treadmills, as well as a digital content and live group training with a current community size of over 1.4 million members.

Management is headed by CEO and Chairman John Foley, who was previously the President of eCommerce at Barnes & Noble.

Peloton develops, manufactures and distributes connected, touchscreen-enabled fitness equipment that streams immersive, instructor-led classes from its New York-based studio to its members from anywhere, anytime.

Below is a brief overview video of the company’s marketing campaign:

Source: Peloton

The firm’s subscription platform combines hardware equipment, proprietary software, as well as fitness and wellness digital content streaming and live group training into a single product that has aided its members to complete more than 58 million Peloton workouts in 2019.

The company’s products are the Peloton Bike, launched in 2014, and the Peloton Tread, launched in 2018, both of which come with a touchscreen that streams live and on-demand classes, interactive software features to encourage frequent use, and a patented leaderboard to inspire its members to track performance and achieve their goals with real-time and historical metrics.

Management claims that as of June, 2019, the company had sold 577,000 Connected Fitness Products, 564,000 of which were marketed in the US, of which over 92% were accompanied by a Connected Fitness Subscription.

The firm’s content focuses on indoor cycling, indoor/outdoor running and walking, bootcamp, yoga, strength training, stretching, and meditation with more than 950 original programs produced on a monthly basis and a vast, constantly-updated library of original fitness and wellness programs.

The company’s content library is accessible through $39 or $19.49 monthly subscription plans, the latter of which is focused for users that desire to stream content on their own devices.

Below is an overview graphic of the company's subscriber base and revenue growth:

Source: Company registration management

Investors in Peloton have included NBCUniversal, Wellington Management, Winslow Capital, Tiger Global Management, Kleiner Perkins Caufield & Byers, Balyasny Asset Management, TCV, Felix Capital, GGV Capital, and True Ventures. Source: Crunchbase

Customer Acquisition

Peloton retails its products directly to consumers through multiple channels, including a network of 74 physical showrooms with knowledgeable sales specialists and through an e-commerce platform.

The firm’s marketing strategies consist of television, digital, and social media marketing, as well as its showrooms and word-of-mouth referring.

Sales and marketing expenses as a percentage of revenue have increased slightly, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

2019

35.4%

2018

34.8%

Source: Company registration statement

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, was a strong 1.5x in the most recent six-month period, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

2019

1.5

2018

N/A

Source: Company registration statement

Management said its average subscriber lifetime value for recent periods was as follows:

  • Fiscal 2019: $3,593

  • Fiscal 2018: $4,015

  • Fiscal 2017: $3,433

The firm also stated the ‘weighted-average 12-month Connected Fitness Subscriber retention rate [was] 95% across all fiscal year cohorts since fiscal 2016.’

Market & Competition

According to a 2018 market research report by Allied Market Research, the global fitness equipment market is projected to reach $14.2 billion by 2025, growing at a CAGR of 3.6% between 2018 and 2025.

The main factors driving forecasted market growth are the growing awareness about health and fitness, an increase in the obese population, various government initiatives to promote healthy lifestyle, and surge in youth population.

The Asia-Pacific region is projected to grow at a CAGR of 6.7 during the period.

Below is an overview graphic of the global fitness equipment market by user type over time:

Source: Allied Market Research

Major competitors that provide or are developing fitness equipment include:

  • ICON Health & Fitness

  • Brunswick Corporation (BC)

  • Johnson Health Tech (TPE:1736)

  • Technogym (BIT:TGYBM)

  • Amer Sports (HEL:AMEAS)

  • Nautilus (NLS)

  • Core Health and Fitness

  • TRUE Fitness Technology

  • Impulse (Qingdao) Health (SHE:002899)

Source: Sentieo

Financial Performance

PTON’s recent financial results can be summarized as follows:

  • Sharply growing topline revenue

  • Strong gross profit growth but reduced gross margin

  • Increased operating losses and negative operating margin

  • A sharp swing to negative cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

FYE June 30, 2019

$ 915,000,000

110.3%

FYE June 30, 2018

$ 435,000,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

FYE June 30, 2019

$ 383,600,000

102.3%

FYE June 30, 2018

$ 189,600,000

Gross Margin

Period

Gross Margin

FYE June 30, 2019

41.92%

FYE June 30, 2018

43.59%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

FYE June 30, 2019

$ (202,300,000)

-22.1%

FYE June 30, 2018

$ (47,500,000)

-10.9%

Net Income (Loss)

Period

Net Income (Loss)

FYE June 30, 2019

$ (195,600,000)

FYE June 30, 2018

$ (47,800,000)

Cash Flow From Operations

Period

Cash Flow From Operations

FYE June 30, 2019

$ (108,600,000)

FYE June 30, 2018

$ 49,700,000

Source: Company registration statement

As of June 30, 2019, the company had $378.1 million in cash and marketable securities and $462 million in total liabilities, with no long-term debt. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was a negative ($191.6 million).

IPO Details

PTON intends to sell 40.0 million shares of Class A common stock at a midpoint price of $27.50 per share for gross proceeds of approximately $1.1 billion, not including the sale of customary underwriter options.

Class A shareholders will be entitled to one vote per share and Class B shareholders will have twenty votes per share.

Multiple classes of stock are a way for management or existing investors to retain voting control of the company even after ceding economic control and the S&P 500 Index no longer admits such firms into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $7.5 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 14.40%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

We primarily intend to use the net proceeds that we receive from this offering and the private placement for working capital and other general corporate purposes, which may include research and development and sales and marketing activities, general and administrative matters, and capital expenditures.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, J.P. Morgan, BofA Merrill Lynch, Barclays UBS Investment Bank, Canaccord Genuity, Evercore ISI, JMP Securities, KeyBanc Capital Markets, Needham & Company, Oppenheimer & Co., Raymond James, SunTrust Robinson Humphrey, William Blair, Academy Securities, Siebert Cisneros Shank & Co, R. Seelaus & Co, The Williams Capital Group, Telsey Advisory Group, and Cowen.

Commentary

PTON is a fast-growing hybrid fitness product and software company that primarily markets its products and services using a direct-to-consumer [DTC] model.

Management also sees the company as having other functions, such as a retail, apparel, and logistics company, so it appears to me that it wants to paint a picture of a more expansive business model than just selling fitness products with some software subscription revenue.

The firm’s financials indicate high revenue and gross profit growth, but increasing operating losses and a sharp swing to high operational cash burn.

The market opportunity for global fitness equipment is large, and prior to Peloton, somewhat static. PTON has introduced a more advanced model integrating hardware with software, resulting in higher lifetime value which will likely attract competitive responses or new market entrants.

As to valuation, management is asking IPO investors to pay an EV / Revenue multiple of 8.17x. While we don’t have a direct public comparable, a subscription software company with this steep growth trajectory would easily command this multiple.

Granted the comparison isn’t the same, but there are elements that are similar, and PTON’s growth curve is nothing short of stunning.

The other aspect of PTON’s success potential is its direct-to-consumer business model. The firm retains its high gross margins as a function of not having to discount to sell through distributors, although it has higher marketing costs as a consequence.

To succeed with a DTC model, it will need to achieve larger size in order to spread the costs of that marketing across more brands and services.

Management’s more expansive vision for the company may be the relevant piece for this greater scale needed to drive efficiencies.

Prospective IPO investors will need to factor in significant hold time for this more expansive vision and scale to be achieved.

While the IPO appears to be compelling within the proposed price range, interested investors should be prepared for an 18 to 36 month hold period before the company can execute the next elements of its drive for scale.

Expected IPO Pricing Date: September 25, 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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