Why shipping delays don’t necessarily hurt Peloton
When Peloton filed for IPO, I wrote about how its core SaaS business is defended by the network effect of the community. It was why I was very confident about the success of its then pending IPO.
Peloton eventually debuted at a nice $7.2B market cap in September 2019 and has since then grown, famously aided by the Covid-19 lockdowns, to $30B.
Success always attracts detractors but somehow in Peloton’s case it’s worse than other startups. Back when its share price wobbled a bit in the early days post-IPO there were journalists attributing the share price decline to them not being a pure software company — while all of them probably typed those articles on their favorite hardware Macbooks, ironically. Those journalists failed to see how the hardware products were merely a necessary conduit to attract users to their ever-growing community of cycling fans and coaches.
Then recently reports surfaced that shipping delays measured in months due to the difficulty to meet soaring demands brought by lockdowns are making some clients unhappy and switched to their rival.
This WSJ article, for example, spent the first 60% of the article describing the seemingly live-or-die problem for the company, quoting disgruntled clients who cancelled and placed orders instead with other makers such as Nautilus.
After quickly mentioning that the problem didn’t seem to hurt the company’s share price that much, the article went on the describe how Nautilus’ share price has grown 10X from $1.5 to $15 with a current market cap of $500M.
The narrative seems to be clear here: Peloton is angering preorder clients by failing to meet the demand in time. This is benefiting the rivals and could be a nightmare for Peloton.
But is that true?
Nautilus being a public company, we can see their financial numbers very easily. For example, in Q3 2019 they ended with $61M of revenue while in Q3 2020 they closed with $155M of revenue, an impressive 154% YoY growth partly attributable, of course, to Peloton’s shipping delays.
Incredible, but is it the full story?
If we take the TTM (trailing-twelve-month) revenues of both companies and compared to their respective market caps and enterprise values (EV), we’ll see a very different picture than what the WSJ article seemed to be suggesting.
Peloton
- TTM = $2.336B
- Market Cap = $32.44B
- EV = $31B
Nautilus
- TTM = $374M
- Market Cap = $599M
- EV = $565M
(All above values taken from Yahoo Finance on 2020/11/25. Both firms have negative net debt at the moment so EVs are lower than Market Caps)
Let’s now compute the multiples:
Market Cap / TTM Revenue
- Peloton : $32.44B / $2.336B = 13.9x
- Nautilus : $599M / $374M = 1.6x
EV / TTM Revenue
- Peloton : $31B / $2.336B = 13.3x
- Nautilus : $565M / $374M = 1.5x
As one can see, the market is valuing the two companies at a huge multiple differences that can’t simply be explained by Peloton growing YoY at 310% while Nautilus growing YoY at 154%.
Why is that?
The answer is in this WSJ article itself:
Picture this: those Peloton pre-order clients that got impatient, cancelled and bought a Nautilus, they all came back to Peloton app and signed up for the $39/mo subscriptions so that they can work out with their friends, meet new friends and learn from the most exciting coaches — all of them already inside the Peloton community.
Historically Peloton has about 25% of its revenue coming from SaaS. Without going into the detail of the quarterly reports, we can do a quick-and-dirty estimation that out of the $2.336B TTM revenue:
- SaaS = $584M
- Hardware = $1.752B
If we assume the market value its hardware business at the traditional 3X — note that the market values Nautilus only at 50% of 3X — then the hardware business should be worth $5.3B. That leaves the valuation of the SaaS part to be $27.14B:
- $27.14B / $594M = 46.5x
A not entirely impossible multiple for a high-growth SaaS business defended through network effect.
This is why shipping delays don’t necessarily hurt Peloton and why its executives are probably not losing much sleep due to it. After all, for all the pure-SaaS envy of the journalists, they should be praising Peloton for strategically “letting” his hardware rivals bring SaaS revenues to it without lifting a single finger, no?
And given that the same Wall Street Journal had recently reported about how Peloton members became such fans of their favorite coaches that they were making and selling outfits mimicking the coaches, and that Peloton is working on its own apparel brand?
Maybe one day in addition to the Hardware multiple and the SaaS multiple, the market can add a Lululemon multiple and an Etsy multiple to Peloton’s market cap!
