Peloton Is a Phenomenon. Can It Last?; WeWTF; WeWork: Is There Any There There?; Dating apps used to seduce gullible investors
1) The New York Times has an insightful article about exercise bike company Peloton, which on Tuesday filed to go public: Peloton Is a Phenomenon. Can It Last? Excerpt:
As far as indoor cycling machines go, the $2,245 Peloton bike is nothing special. It has a sleek black and red frame. It has a big screen. It's on Wi-Fi.
But a combination of aspirational infomercials ("This ... is fitness evolved.") and streaming classes taught by glamorous instructors has led Peloton to sell 577,000 of its bikes and treadmills in five years. Richard Branson is a fan. So are Jimmy Fallon, Kate Hudson and the Obamas.
Now as Peloton prepares to go public, the New York City-based company – which investors have privately valued at $4 billion – is facing questions about how long it can stay on top. Fitness is a historically faddish category. Exercise manias, from the Thighmaster to Tae Bo, have all come and gone. SoulCycle pulled its initial public offering entirely.
For Peloton, some troublesome signs have emerged. The company's losses have more than quadrupled in the last year. It is embroiled in legal fights over music and patents. Competitors and copycats are moving in aggressively. And the boutique spinning craze has started to wane.
I know quite a few people with Pelotons, and they all love them – I've even thought about buying one myself – but count me a skeptic on the stock at this valuation. In addition to the reasons cited in the NYT article, another major concern is that the subscriber churn looks to be far higher than the 0.7% monthly rate the company touts. The reason, as this Twitter thread shows, is that it's calculated by dividing the number of subscribers who cancel (net of reactivations) by the "average number of Fitness Subscribers in each month."
The reason this calculation is misleading is that most subscribers are on a 12-, 24-, or 39-month subscription. Let's say the average is 24 months... In this case, the more honest calculation of subscriber churn is the number of people who cancel divided by the number of subscribers two years ago! Given that the company's revenue more than doubled last year, you can see how different this calculation is.
(Incidentally, similar math applies when calculating loan default rates. One of the many reasons investors failed to see the looming blowup of many financial institutions like Countrywide and Washington Mutual from 2000 to 2007 was because their loan default rates looked artificially low due to the rapid growth of their loan books.)
Overall, I share the view of the CEO of Stansberry Research, Mark Arnold, who told me:
Even though I forked over the cash and the subscription, I doubt the phenomenon will last.
To be clear, I enjoy and have regularly used the bike. But I hear Bowflex when I think about investing in the stock.
2) No matter how risky Peloton's business model is and how absurd the company's valuation is, nothing holds a candle to the utter scam of The We Company, parent of office leasing company WeWork.
Here's an article by my friend and favorite tech commentator, Scott Galloway, who, as usual, pulls no punches (the last two sentences in the excerpt below are especially brilliant!): WeWTF. Excerpt:
Find the hottest sector, and if you don't have the insight, IP, genius, capital, code, skills, human capital, or a clue, then just borrow the words. SAAS firms trade at a multiple of revenues (yay), vs. real estate firms, which trade at a multiple of EBITDA (boo). So, We isn't a real estate firm renting desks, it's a Space as a Service (SAAS) firm. I know, use the word "technology" over and over, despite having little R&D and computers and stuff, and voilà ... we're Salesforce.
Today I froze water and used this technology to reconfigure the environment encapsulating my Zacapa and Coke. So, I'm Bill Gates. Better yet, today I began calling my wife Gisele, which I'm pretty sure means I'm the starting QB for the Pats.
At WeWTF, you're not a guest, but a member. Member has a more "recurring revenue" sound to it. So, I plan to be a member tomorrow night at the Marriott in Boston, where I will then get membership to the TD Center so I can watch a 21-year-old Canadian (Shawn Mendes) with my 8-year-old son – also a member of the Marriott and TD Center, for tomorrow at least...
There are other businesses like this (real estate, Hertz), and they are good businesses. Businesses that trade at, I don't know, 0.5 to 2x revenues. However, WeWTF is claiming it's not in this neighborhood, or even the same planet. So, let's talk valuation.
Insane. Seriously loco. Ok, let's assume WeWTF is onto something, better than peer IWG or Hertz. But is this firm, trading at 26x revenues, superior to Amazon, which trades at 4x revenues? There appears to be no scale effects, as losses have kept pace with revenue growth. There is little pricing power, as they are still a mole on the elephant of commercial real estate. There is no defensible IP, no technology, no regulatory moats, no network effects, and no flywheel effect (the ancillary businesses are stupid, just stupid).
The last round $47 billion "valuation" is an illusion. SoftBank invested at this valuation with a "pref," meaning their money is the first money out, limiting the downside. The suckers, idiots, CNBC viewers, great Americans, and people trying to feel young again who buy on the first trade – or after – don't have this downside protection. Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity. The bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors visiting the unicorn zoo. Any equity analyst who endorses this stock above a $10 billion valuation is lying, stupid, or both.
3) Here's another of my favorite tech writers, the New York Times' Kara Swisher: WeWork: Is There Any There There? Excerpt:
The selling point among those who think the company is visionary is that having a great brand, consumer awareness and first-mover advantage makes the deal attractive.
All true, which is why it is perplexing that the We Co. has managed to paint its prospects so very badly and made even its fans wonder if there is no there there.
"When companies fight you on understanding the basic proposition of the mousetrap, it's always bad," said Mr. Wallace of Triton to Bloomberg. "People who have good mousetraps say, 'This is the thing: You put the cheese in, the trap is designed to never break your thumb, and it catches mice nine times out of 10.'"
The question then is this: Is We Co. actually an investor trap? No one seems to agree on an answer yet, but until its stock hawkers can assure potential shareholders it is not, here's a pro tip: Enjoy the kombucha, but stay far away from that cheese.
4) You really can't make this stuff up: Dating apps used to seduce gullible investors. Excerpt:
ASIC is suing National Australia Bank over its "introducer program", alleging the bank used hairdressers and gym instructors to illegally reel in borrowers who could not afford to repay loans.
The regulator also last week announced plans to ban contracts for difference, along with similarly complex and risky binary options.
Major industry players claim they welcome the regulator's efforts to boost transparency but are opposed to plans to reduce product leverage to about 20-times, which regulators claim is in line with best practice across the Asian region.
The products are also backed by sophisticated investors who claim the issue is educating investors to the potential risks of the products, rather than banning, or radically reducing leverage.
The number of investors and brokers has soared in the past two years as Australia became a regional centre for contract for difference across the region, including China where the products are banned.
Confidential market analysis provided to The Australian Finance Review reveals male investors claim women introducers described themselves as wealthy investors who had made lots of money trading in the products and encouraged them to set up accounts, trade and made trade recommendations. Other popular introducers include taxi drivers.
The investors claimed they were pressured into depositing more money and continue trading even after suffering high losses. Some claim they have been encouraged to use their superannuation to top up gaming accounts.
(To read the entire article, which is behind a paywall, save it to Pocket, a brilliant app and browser plug-in that I use daily. This trick also works for reading Bloomberg articles.)
Best regards,
Whitney