Good Morning! 

 

Everyone loves asking when the bottom in the public equity markets will be in.

 

The answer? Who knows. 

 

What I do know is that when all of my friends are talking about I-Bonds and not crypto we have to be getting close.

 

Also, get your gym clothes ready because the next two editions we will be breaking down Peloton and comparing it to the privately held Tonal! 

 

Showtime!

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DEEP DIVE

Peloton

 

On February 8, 2022, Brian McCarthy was tasked with the challenge of a lifetime – turning around Peloton. McCarthy, the long time CFO @ Netflix and Spotify would be replacing founder and longtime Peloton CEO John Foley. 

 

Just a year earlier, this statement would have sounded impossible. Peloton was riding high @ around $150 a share – a ~600% increase from the 2019 IPO @ $27 a share ($8B valuation). This move was fueled by COVID tailwinds and skyrocketing revenue in FY ‘21 of over $4B, representing 120% YoY growth. 

 

Fast forward to today? The stock is trading @ less than $7 a share. This represents a 95% decrease in valuation placing the market cap at ~$2B.

 

What the heck happened? 

 

A misguided north star.

 

Foley & co. believed that Peloton increase in demand was here to stay and that they had to scale manufacturing significantly. However, this was not the case.

 

People were returning to IRL gyms, supply chain costs and recessionary fears were rising, consumer spending was decreasing. 

 

These themes are best represented by Peloton’s losses in the first half of the year of $810M. The whole year prior they lost $189M. 

 

This led to long time CEO and founder John Foley being ousted and ultimately replaced by McCarthy who made sweeping changes off the bat to get Peloton pedaling in the right direction laying off 2,800 workers in the first day. 

 

McCarthy continued his aggressive actions decreasing prices, cleaning out inventory, and cutting costs wherever he could. 

 

In the second half of the year alone, the company lost just over $2B as the restructuring changes have taken full effect. 

 

However, McCarthy shared that there is light at the end of the tunnel as he expects the company to be able to attain cash flow positivity by the end of next year – a while away, but he does see the ability to profit. 

 

Speaking of the light, lets discuss what Peloton does have going for them.

The Light

 

“When you look at our financial performance in Q4, I suspect what you see will be a function of where you sit. The naysayers will look at our Q4 financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses. They will say these threaten the viability of the business.

 

But what I see is significant progress driving our comeback and Peloton’s long-term resilience. Important milestones reached include new executive leadership, renegotiated supply contracts, and significantly reduced cash outflow.”

 

-Bob McCarthy, CEO of Peloton

 

Outside of Peloton being one of the hottest brands in the consumer space , the company does have a serious stream of recurring, high quality revenue from its dedicated users. 

 

The company left FY ‘22 with 6.9M total members and 2.996M connected fitness subscriptions for a total of $383M in subscription revenue. For reference, at the end of Q4 ‘21, the company had 6M total members & 2.331M connected fitness subscriptions for a total of $282M. 

 

This represents 36% revenue growth in this revenue segment. The margins on this revenue are also very high and improving (due to price increases) 63.3% (Q4 ‘21) to 69.7% (Q4 ‘22). 

 

One thing to keep your eye on however, is a slight increase in churn. Last year in Q4, the company saw a .73% churn rate in connected fitness subscriptions and this Q4 saw a rate of 1.4%. It is still a really low churn rate, however, a 2xing churn rate is something to keep your eye on. 

 

If McCarthy can get the burn and unit economics of the bike itself under control, there could be a real business here and definitely one that would garner attention from a company possible acquirers like Apple or Nike. 

 

Additionally, McCarthy is very focused on trying to grow the top line membership as well for Peloton envisioning a long term target of 100M total member subscribers, representing the total half of in person gym memberships in the world. 

Alan's Angle

 

I really think McCarthy is going to get this ship, or I should say bike, going in the right direction. He is just making all of the right moves. 

 

Another strategic move that I really like that McCarthy is taking is really trying to make Pelotons as easily accessible as possible through distribution deals. Over the past month, we have seen Peloton start:

• Selling bikes on Amazon, a big shift away from pure DTC
• Being available for purchase at Dicks Sporting Goods
• Sign a deal with Hilton to have Peloton bikes in every US hotel

McCarthy has his eyes on cranking up the Peloton subscriptions and wide accessibility helps greatly. 

 

I can most definitely see a scenario where this company gets acquired for 2-3x its current valuation. The recurring revenue is real. The power of the brand is real. At the same time, from an investment perspective, I am not touching the stock due to the downside risks. 

 

Prediction: Nike or Apple acquire Peloton in late '23.

 

-Alan

CHART OF THE WEEK

• My favorite CNBC personality/host Carl Quintanilla shared a great chart with the interesting takeaway that long energy and short Bitcoin was the trade of the year. 

IN THE NEWS

The Rundown: Softbank announced last week that they would be laying off 30% of their Vision Fund Staff 

 

3 Key Points:

• This move means that about 150 people will be losing their jobs, impacting significantly more employees than originally anticipated
• This comes after SoftBank lost a whopping $23.4B in this past quarter of which $17.3B was due to The Vision Fund. 
• The Vision Fund has backed 470 startups over the past 6 years

Alan's Angle:

 

Have no worries. Just because times have gotten tough for Softbank, does not mean that Softbank is stopping now as WSJ reported that they have plans to launch another fund. 

 

What is most interesting to me is a point that TechCrunch pointed out that Softbank believes the winter in the VC markets could be just getting started due to unicorn founders desire to not cut valuations just yet. 

 

At the same time, I think the valuation cuts will be coming and sooner rather than later. Why? 

 

Because the unicorns need their cash. 

MEME OF THE DAY

JOBS

Here are some jobs that I’m curating in finance and tech. Use this link to submit a role to be featured if you’re looking to hire.

 

Financial Operations Associate @ Acorns

Acorns gives consumers incredible tools to save money for the long run and now they are looking for a Financial Operations Associate to join the team!

 

Investor Relations Specialist @ Toast

 

Toast is one of my favorite FinTech companies in the game and they are looking for someone to help show the world why their stock is a great one. 

 

Marketing Analyst @ Square

Square/Block, the FinTech company is looking for someone to be their next marketing analyst focusing on SEO.

GOLDEN NUGGETS

• Liquid Death is now valued @ $700M! This beverage company might deserve a feature piece in The Crossover.
• Really enjoyed this 20 minute CNBC sit down with Scott Minred, CIO @ Guggenheim talking about the state of the economy and different opportunities 
• Patrick Mahomes. No words. What a play. 
• All hell broke loose at the end of the Giants & Bears game
• Kodak Black stepping up when people need support the most 

Thanks for the read! Let me know what you thought by replying back to this email.

 

— Alan 

 

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.

Written by me, Alan Soclof.

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