The acquisition that never happened: Apple + Peloton

-
One of the primary reasons I held on to my Tesla stocks during the “darkest days” of the Model 3 rollout was because I was certain either Apple or Google would acquire it. This is why I was very surprised when Elon Musk tweeted today that he wanted to sell Tesla to Apple but that CEO Tim Cook refused to take the meeting. Tesla isn’t the latest Apple acquisition bet that I got wrong though. That’d be Peloton.

IMO, Peloton’s rally will outlive COVID. It's on track to ~$2B in revenue at the end of this year- that’s a year-over-year (YOY) growth of 100% - and yes the pandemic has helped a lot but the company projects to hit ~ $4B by the end of 2021. Since it IPO-ed, Peloton has had all the makings of an exceptional business that would be a great candidate for Apple to acquire. I was dead certain that it would be a matter of time before that happened, especially as Tim Cook pushed to quadruple revenues from Apple Services and turn it into a $50B per year business.

Peloton ticks many of the boxes that make it so Apple-like. In my mind, Peloton is the new product line that would generate over $8-10B per quarter for Apple:
  • Peloton is vertical - it makes, fulfills and even installs its HW. It's very customer centric and its products are beautiful - they would be a perfect addition to Apple's physical stores.
  • Peloton has a lot of recurring revenues. It is quickly approaching 1.5 million connected fitness (aka paid) subscribers, locked into a recurring revenue relationship with the brand. Apple is bundling its Services (music, storage etc.) with the objective of turning them into recurring revenues. Peloton's business is built around this model and it has its subscribers locked in. It enjoys a 94% retention rate - that's a rate that Apple would be proud of and is on par with Netflix/Prime. Don't bet on that rate going down. Just like Spotify and Netflix, Peloton is poaching premier fitness talent from rivals to exclusively teach within the Peloton ecosystem. Peloton awards instructors equity in the business, giving them a vested interest in the firm’s growth. In turn, instructors achieve celebrity status.
  • Peloton has very high gross margins (~48%). Margins are the litmus test of differentiation - ask Apple - and Peloton has greater margins than Apple, and is growing much faster at 100% YOY. 
  • Just like Apple users, Peloton's are fanatics and love its products. Peloton's Facebook page has ~ 750K followers. Their base also continues to work out more than average. Yes, that’s in part due to some households sharing their memberships among multiple people. But that's even better and makes the subscriptions much harder to cancel - the only thing better than recurring revenue is a recurring revenue bundle. During its last earnings call, Peloton said its connected fitness subscribers are averaging 20.7 monthly workouts, up from 11.7 a year earlier.
When I bought Peloton's stock, I was hoping that Apple would pay a 50% premium for the Apple of fitness, and register less than a 0.5% dilution. The stock is up ~ 450% since then. Can Apple afford Peloton? Of course it can. Apple is the richest company in history and has loads of cash. I still think it's worth it for Apple to acquire Peloton and dish 50% premium over the current Peloton stock price. The acquisition of Peloton would provide Apple with a product line that has greater margins than the most profitable product in history, the iPhone, and at least as much money as Apple makes from all its wearables and accessories.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.




Comments

Post a Comment

Popular posts from this blog

Bitcoin and the 99 other coins

-
So far Bitcoin is having a decent 2021. It hit a record high of more than $41.5K last week, continuing the upward trajectory it has been on since April of last year, when a single Bitcoin cost less than $5K. That rise now means that the sum of all Bitcoins in existence is worth more than $700B.  Because Bitcoin dominates much of the media's attention, it can be easy to forget just how many other cryptocurrencies there are. A quick look through the full list from coinmarketcap reveals over 100 alternative cryptocurrencies with a "market cap" of more than $100M. Each hoping that their unique take on the core blockchain technology will be enough to propel them out of obscurity, to where Bitcoin is today. With some of the names on the list you can't help but think someone is having a joke, or planning something nefarious - there is a "dogecoin", "YEP COIN", "OMG" and even "SushiSwap" (???). This time it's... different? Some of
Read more

Why the stock market is beating expectations

-
Image
  In the early stages of the pandemic, the S&P 500 index dropped a third of its value. Since then it has roared back, soaring more than 50 percent from its low in late March and setting an all-time high last week. This seems very implausible when set against the current state of the economy and the ongoing devastation caused by the pandemic. So why is the stock market rallying in the face of a pandemic and bad economic news? Several explanations are plausible. The stock market is not the economy: The stock market represents publicly traded companies only; it’s not the whole market. Most importantly, it’s always forward looking; i.e. it’s an indicator of the future earnings of those companies and how they would fare in the future. A rising stock market indicates that investors think these companies will do better in the future. On the other hand, a falling stock indicates that investors are pessimistic about the future earnings of companies. Continued income support for the econom
Read more

Netflix: No more burn?

-
In the last article on Netflix , I discussed why Netflix's promise to premiere a movie every week is not an overly ambitious strategy for the streaming giant. It's a brilliant move that isn't risky because Netflix can keep spending at this high rate for a long time. Yesterday's earnings call confirmed this. During the call, Netflix announced that it does not intend to raise any more capital, through debt or equity, as it plans to be cash-neutral this year and cash-flow positive beyond 2021. Looks like all those price increases are flowing through to the bottom line. Of course, saying you don't need any more capital is a really great way of getting people to offer you more capital at even more attractive rates (if you ever did want it).
Read more