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121: BONUS EPISODE: Peloton IPO Special with Michael Jurenka

TCO 121 | Peloton IPO

 

Peloton’s SEC filings are public, and for those of us outside the financial sector, we are left wondering what it all means. In this special bonus episode, Crystal and Tom O’Keefe bring out an equally special guest who can bring to light all of these complexities. We have Michael Jurenka, a certified public accountant and Peloton owner. Michael brings both his financial expertise and love of Peloton to the table as breaks down Peloton’s filing – from its margin on selling and subscription to the music licensing and more. He also breaks down some of the pros and cons of the IPO filing, helping us understand the whys and hows of the entire process. Join Crystal, Tom, and Michael uncover more of this matter.

Listen to the podcast here:

BONUS EPISODE: Peloton IPO Special with Michael Jurenka

“If Peloton wanted to, if it slashed its marketing and it stopped opening stores to sell the product, it could probably be profitable next year if it wanted to.”

Joining us for a very special bonus episode to discuss exactly what all the fancy government filing paperwork means is Mike Jurenka. How’s it going, Mike?

I’m doing well.

Mike, can you start by giving a little bit of your background so people know where you are from an expertise standpoint?

I grew up in Montana and I went to Montana State University and became a CPA. I got my degrees there. I moved out to Seattle. I worked for a CPA firm for about five years mostly focusing on the tax side and not so much the auditor accounting side. Years ago, I started my firm with another business partner in a little town called Issaquah, which is a suburb of Seattle. We do mostly federal and state income taxes but I also have an affinity for investing and get a lot of questions from my clients about financial planning matters. This is not the first official government form I’ve ever read and look through though that’s not probably the most exciting.

Before we dig in, we should probably put a disclaimer on this that this is not financial advice.

This is for entertainment purposes only because we wanted to dig in. I especially am a big old Peloton nerd, we wanted to dig in a little more.

We’re getting somebody who knows this world a little bit better but do your own digging. Don’t hear this as an endorsement or an unendorsement. It’s a discussion.

I should also disclose that I’m a little bit biased as well because I’m an owner of Peloton Bike.

That makes a difference here. A lot of times with the product, with something this, you have to be careful probably about being too close to the product. A lot of the articles I’ve been reading, it seems like the opposite is at play here. That if you’re not close to this product, I feel it’s easy to be dismissive of it.

All the articles that I looked at getting ready for this, they don’t get the product. They didn’t spend any time with the product. It shows in the articles. As you said, “It’s an infuriating how little research they did.”

The one I posted, which we’ll get into on the next episode of the show, but I wanted to punch somebody by the time I was done reading it.

In the immortal words of Donald Rumsfeld, “You don’t know what you don’t know.” That’s a lot of what’s at play is that it’s easy to go, it’s an exercise bike and we’ve seen those before. It’s a big deal. You put a monitor on it. It is more than that. If you’re not engaged with it, there’s no way for you to know that.

Having said that, let’s talk about the actual SEC filing. What were your overall initial thoughts? 

I thought it was an interesting read because being an accounting person and a CPA, we’ll go into a business and I’ll see what they’re selling or something. I’m like, “I have no idea how these guys are paying their rent.” Cupcake shops confused the heck out of me because I’m like, “You have to sell a lot of cupcakes to pay rent here.”

They’re like $8 cupcakes.

The Peloton filing was interesting because it was the first peek into, how is it this company is working? I had a lot of misconceptions about how they were making their money that the registration statement put to bed. The biggest shocker out of it for me even though I have no background in music licensing or anything, but it was obvious from the registration statement that is a super complicated part of their business.

The average person doesn’t grasp how complicated that issue is. It’s not settled law yet. It’s still the Wild West when it comes to a lot of that stuff. 

One thing that I feel some of the articles have stated correctly is that there were some surprises in the filing. Things like the cost of the hardware, cost of the software, what kind of profit margins they had, salaries, what are your thoughts on those types of surprises?

I was surprised that they were making quite a decent margin on selling the Bike and the Tread. I had assumed that they were more of like a Costco model or even an Amazon Prime model where they’re making most of their money on the subscription because once they got the bike in your house, the only way to get programming to it is to subscribe to Peloton. I was like, “This $40 a month, they’re probably making a killing on this $40 subscription.” They’re selling you the bike at cost or barely above to get the bike in your house, to get you the subscription but that wasn’t the case at all. I was surprised that they’re making a 42% margin on selling us the Bike and the Tread and they’re making them about a similar margin on the subscription, which I expected to be higher. The music licensing, part of it is a big chunk of the costs of that subscription.

I was surprised at that as well. As far as what the margins are, however, I couldn’t help but wonder if it’s because early on, we were told from the media that it was a loss leader. I don’t think we all got that in her head. It was reported as such. Maybe over time, I don’t even know if this is possible, but in my head, it would seem logical that when they first started making the bikes, it was a loss leader. They were selling it at a loss. Over time, as more and more people could sell more and more then they scaled it. They’ve been making them for a number of years now. I feel like is it possible over time that the reverse has become true?

That’s probably true. They do mention in the registration statement that they’ve added or invested significantly in improving the process of the production. That’s building efficiencies into that supply chain has helped boost their margin. Maybe when they first did start, they weren’t making money on it and it was a loss leader, but as it continued, it’s been steady. If you look at the three fiscal years, the margin has been steady. They figured that out early on.

Peloton could start making money. If it wanted to, it could make money tomorrow. Click To Tweet

For our nonfinancial people, I’m asking for them. Maybe explain what a tender offer is. There’s no swiping. 

What they did, I would assume that when some of their investors on one of the rounds that they did came to them and said, “We want to own 15% of this company after we do this deal with you, but we can’t do that unless some of these other people who have stock options, exercise and sell those options to us.” What they did was in those rounds make an offer to people who held those stock options and made a market for them so that they could reduce essentially their ownership percentage. I’m guessing that’s why those tender offers are made. That does happen in the private equity world where they’re looking at investing in a company. They want a certain stake in that company going forward. That’s why those likely were made. It might also have been made to help those executives get some cashflow too.

People do lose sight in those early years. They weren’t exactly raking it in. They were pouring it right back into the company. I’m sure that was probably a way to get a paycheck for some people.

I assume that the $500,000 salary you see listed for some of those people for their base salary, I’m sure they weren’t getting paid back in the early years.

People that I have talked to that worked for Peloton off the record have told me that is not the case. I don’t want to get anybody in trouble, but I know that was not always the case. As far as surprising things, the losses are a big point of contention for a lot of people, they’ve quadrupled in the last year. As I think about all the things that have been going on with their expansion into London, the new HQ, they’re building, the new studio they’re building and of course their huge increase in marketing. What would be reasonable to accept? I feel like the losses are normal, but it seems like a lot of people are very put off by it.

It’s hard to say for this type of company if a $500 million or $200 million loss is acceptable. It’s individualized by the company. The other thing you’ve got to remember about financial statements is we’re looking at a specific period. Peloton is what I would argue is a hyper-growth or expansion stage because they’re trying to continue to be the leader in this industry. They’re the first mover. They’ve got to stay ahead of everybody. They’ve got to make certain investments and all those things you mentioned, the new headquarters and studio, that’s not a cheap proposition. That’s a 21-year lease.

Especially in Manhattan.

Rents are not cheap there. The new London studio just came online. They had to build a whole production studio over there.

Simultaneously in two of the most expensive cities on the planet.

Don’t forget hiring talent for London too. They’re going to have to build that up. I know according to the Prophet, they’ve only hired one more instructor for London, but more are coming.

They wouldn’t have built that so that the two that are there now would be the only instructors. They’re going to start filling out that schedule. The other part about the loss, we won’t know probably until another 1 or 2, 3 years if these investments in these types of things have paid off for them. There were also parts of they’re losing money. I don’t find that odd at all, particularly where they’re at in the market. The other part of it that is good to see, even though they are losing money, is they’ve had a 500% growth in the number of subscribers to their content from June of ’17 to June of ’19. That is unbelievable growth. As I’m reading through the statement, I’m picking out these little tidbits. Their employee headcount went from 450 to 1,950. That’s huge growth. They launched Peloton Digital in 2018. It went from 0 to 100,000 subscribers. They added eighteen instructors in the fiscal year 2019 and it’s been a 100% increase in revenue year over year for the three prior fiscal years that we can see. Those are all things that are great to see for a company that’s focused on growth.

TCO 121 | Peloton IPO

Peloton IPO: Peloton is at a hyper-growth or expansion stage because they’re trying to continue to be the leader in this industry.

 

If they were making these investments and you weren’t seeing increases in the subscriber base and all those things, that would be even more concerning. If they’re losing money and what they’re spending it on is not paying dividends to back to the company in growth and their subscriber base. In the very first section of the registration, they talk about, what their market is and who they’re targeting. I think the whole Peloton’s luxury or wealth brand gets overblown too because I’m not a wealthy person and I own a bike. I know lots of other people who I wouldn’t label as wealthy who also own this equipment. Their market, they say they’re trying to reach 67 million households in the United States and they’ve barely tapped that market.

I saw that listed. What do they call that?

It’s the TAM.

It’s the Total Available Market.

The thing I find interesting is that when you say that they’ve seen a 500% increase in the subscribers over the last 2.5 years. I find it fascinating that we’ve seen almost the exact same number in the growth of this show. We’ve also seen 400% to 500% growth in our subscribers over the last 1.5 to 2 years.

In other words, that number we don’t feel is inflated because we’re seeing it play out in real life in our own doing the show.

Ernst & Young is their accounting firm and most people didn’t get past a page 80 or a page 100, but these financial statements have been audited by an accounting firm. The accounting firm is signed off that they tested different things to make sure that what the company was telling them was true. They’ve done a deep dive into these financial statements and none of this stuff is over-inflated there. It is what it is. They’re doing a good job. You think about the net loss in a growth company, you’re concerned about how fast are they burning through their cash reserves. If at some point they run out of cash and they can’t continue to fund their growth, then you’ve got a problem.

Think of Tesla. They’re a company that’s past their growth stage and is having a significant problem generating and it’s still burning through a significant amount of cash. In Peloton, that’s not the case. That’s probably why they’re going to IPO is because they probably tapped out the private equity markets at this point. The last investor in the Series F put in $500 million. If the next round has to be bigger than that to support a bigger valuation and should be based on their financial results. The private equity firm is probably not ready to throw down $1 billion to help them get through the next couple of years. The initial public offering was probably their only option.

How do they arrive at these figures in terms of if a company is losing money, what’s the math on how but it’s worth $1 billion or $5 billion, even though on paper it’s trending the other direction?

The last company that bought the Series F put in about $556 million. They got a certain percentage equity stake in the company for that investment. You take that number to divide by whatever the interest they got and that gives you the valuation of the entire company. Even though companies are losing money, their valuation can still be going up because at some point, Peloton will not need to spend this much on marketing to get more customers. Word of mouth is going to take over. They don’t need to run those flashy ads on television as often.

At some point, they’re going to have saturated the store market too. There’s not going to be another mall that they need to open a store in to reach any more customers. Those expenses are going to start to taper off. At that point, hopefully, the revenue from the subscribers has also continued up to the right significant growth trend. Those variable costs are going to start shrinking. Peloton could start making money. If it wanted to, it could make money tomorrow. Its products are driving revenue and margin. They’re spending more than they’re getting in the margin to essentially increase the subscriber base over time.

To be a first mover, you need to be out there grabbing the biggest chunk of the market share before somebody else comes along. Click To Tweet

To that point, one of the criticisms that they are getting is that in the past, John Foley has been on record as saying, “We’re profitable.” The financial records are saying, “We’re not profitable.” People are making it sound like he lied. John Foley, in my opinion, is a good person. I do not believe that is true. That’s my personal belief. I have nothing to base it on other than having conversations with them. That’s not how Peloton is in general. What other things could explain that?

He probably segregated these. The income statement is a high-level statement. You’re not seeing all the numbers that go into what’s in that general and administrative expense number.

That’s what I was thinking.

He’s looking at somewhat different reports then we’re seeing the registration statement and saying, “The company is profitable.” If Peloton wanted to, if it slashed its marketing and it stopped opening stores to sell the product, it could probably be profitable next year if it wanted to. Frankly, it almost was in a fiscal year ’18. The other thing that the financial statements are somewhat, what I call misleading unless you understand financial statements is they lost $195.6 million is what the income statement says. There’s another schedule farther back in the notes that say, “This is what our EBITDA loss was and that’s Earnings Before Interest, Taxes, Depreciation and Amortization.”

Basically it’s, “What is our true non-cash loss or true cash loss?” There’s a bunch of things in the financial statements that it didn’t cost them money, but it’s an expense on their financial statements. It may have cost them money in a previous period. Think about all the TIS the Tenant Improvements for the Studios and stuff. Those have a useful life of say, ten years or however long the lease is. Those are being amortized and depreciated over their historical life. If you look at the EBITDA, one schedule, their loss last year was $71,000. In fiscal year ’18, they had a positive EBITDA number. It’s possible that’s what he was referring to. If Peloton wanted to, they could become profitable next year.

They need to stop spending money on the growth, which is its own danger too because they’re trying to be a first mover. To be a first mover, you need to be out there grabbing the biggest chunk of the market share before somebody else comes along. It’s like the Apple and Samsung thing. Apple was the first mover. A bunch of people has iPhones and they tried to grab up as much of that market share as they possibly could. Samsung may be copied them, who knows? People are moving from iPhone to Samsung. They’re trying to grab as much market share and hold on as possible. In order to do that, they need to make these big investments and spend more money than they’re making.

It’s similar to what Netflix has been going through. They know all these studios are going to start throwing streaming companies at them like Disney+. They’ve been throwing money against the wall on content because they knew that they would start losing content very quickly and having competitors.

There are downsides in this report though. What would you say are the biggest cons for Peloton in the filing?

I would say that in the report, the risk to our business go on for 30 pages. I’m not a lawyer, but this is probably done to make sure that they get all the risks as possible outside of the business. A lot of these are risks that any business faces and are pretty mundane. They talk about foreign currency risk. Every business that operates in more than one country has foreign currency risks. They talk about maybe they have paid a processor and they won’t give them the money from the subscriptions. There are tons of risks that every business even a small CPA firm from Issaquah faces. It’s a little misleading as to how much was listed there. The one risk though as I think about this more and more is the instructors.

You remember back in the day when there was a Sirius Radio and an XM Radio and they weren’t combined as SiriusXM Radio. What they were doing is similar to the Netflix-Disney fight is they were outbidding each other for content. They’d bid themselves in the bankruptcy essentially. That’s why we now have a SiriusXM Radio. Could that happen to Peloton in the future? I look at all those stuff following that some of these instructors have and let’s say another company comes in and says, “I want a Matt Wilpers and I’m willing to pay whatever it takes to get Matt Wilpers on my brand and no longer with Peloton.”

Peloton is either going to have to let them go or step up and pay that ridiculous fee. That could happen with any of their instructors that have a big following. That is a risk down the road. The other thing, which is definitely highlighted and we already know from the music licensing lawsuits and stuff that have had been happening and the amount of content that got pulled off the bike. I got mine after the whole content dump. I didn’t realize what was happening, but the music licensing and royalty pieces is also a gigantic issue for them.

TCO 121 | Peloton IPO

Peloton IPO: At some point, Peloton will not need to spend this much on marketing to get more customers.

 

That will fall into place eventually because people want to make money off their music. At some point, they’ll figure out a price point that everyone agrees with. It’s a fistfight over what that price point is going to be. At some point, there’s no way that as the music moves forward and you see fewer and fewer records sales, now people aren’t even buying digital copies. They’re streaming and all these music companies, they need to figure out a way to monetize their songs. Things like this are new avenues in which to do that and they want to make sure they’re getting paid appropriately because they’ve seen what happens when they don’t. They get $0.01 for every spin on Spotify and get three million plays and a check for $0.45. I get that they want to carve out and make sure that they get a good deal moving forward but I do feel at some point, that it will resolve itself.

They’ll essentially come to an industry-standard that said, “This is how we do it on streaming.” That costs will become more fixed over time as the market for streaming content gets more and more solidified because right now, it’s a Wild West it seems like.

In regards to people, upstarts potentially poaching instructors, what it reminds me of is professional wrestling. I know that sounds weird, but you saw this in the ’90s with professional wrestling where Ted Turner wanted to start his own professional wrestling thing to air on the TBS properties and then they came in. They spent a ton of money to poach the big names away from what at the time was the WWF. I can’t remember what it was called, but they’re a startup one. It was airing on TBS. That’s why it’s so important for Peloton to stay in this growth mode in terms of dumping money to solidify market share because that’s eventually what killed the other wrestling league was that they would bring over all these big names.

They would poach the Hulk Hogans of the world, but they couldn’t crack that nut. A lot of times, you’d go into the markets and there’s only one arena in which to do a show. They would have to go to these other venues that were either way too big or way too small and were constantly playing catch up. It lasted for a few years and a lot of wrestlers made way more money than they should have. It collapsed and they all went back to the WWF. That’s why it does make sense for them to hemorrhage money at the moment to establish market share. That prevents someone from coming in and trying to gut their instructors to go to a rival brand.

The other thing, maybe Crystal, you’ve probably known more about this than I do since I’m not nearly as deep in the Peloton. As the community grows, it’s going to become harder and harder for riders and runners to get shout-outs and stuff for milestones. When there are more and more people taking that live class, they don’t get a shout-out. Is that going to get frustrating for people? It doesn’t matter to me. I don’t care but it may to some others and so maybe that community feel of the shout-out thing will get lost. We’re already seeing it. I know I’ve seen some stuff on Facebook and people being disappointed. They didn’t get a shout-out to their milestone rides or complaining that, “This person’s got all their ten-minute cooldown ride still counted. That’s the reason why they’re at 1,500 rides.” Is that going to become an issue down the road?

I don’t think that’s going to change the community. What you will see is that Peloton will eventually find a way to go around that. I remember not this past year at Homecoming but the year before that, people were already complaining about it. It was one of the questions that came up when we talked to John Foley live because we interviewed him at Homecoming. He said at the time that he felt strongly that all of the instructors should be free to give the shout-outs whatever they wanted. Somebody had come up with a suggestion like, “Do the shout-outs for 50s or 100s, not every quarter.” That was the suggestion. He was like, “The instructors ought to have the freedom to do whatever.”

That will always remain, but I also think that as their technology gets better and since you’re a newer rider, you may not know this. They used to have small screens in the studio. When the instructors would have all of us in a class, they had nothing to call out who was getting a shout-out. I would say it was mid-2017 that they came out with the bigger screens in the studio that the instructors were using. Now, they have people that are bolded in red for their milestones. They will keep going down that road and everybody who has a milestone for a multiple of 100 will be in a different color than everybody in a multiple of 50 and everybody in a multiple 25.

Birthdays will probably be a different color as well. They’ll come up with some way to highlight that for the instructors so that they can make their choices accordingly. That’s a guess. Peloton feels strongly about maintaining the choices for the instructors. They don’t want to get down to the nitty-gritty of saying, “You have to play this song or you have to do it this way for a shout-out.” They want the instructors to be genuine. That’s important to them.

The other thing that is going to become interesting as they add more and more subscribers. I don’t know what all that technological things that are needed to connect, say 500 riders to a lively ride. At some point, are they going to have to say, “We can’t support 1,500 live riders on a ride. You’re going to have to schedule or reserve your spot for a live ride?” I’m on the Pacific Coast until the woman’s studio open, there was nothing live for me to do. I’ve done everything on demand and I still love the product.

I don’t think that’s the case because there was a time that they did this World Record Ride and they had as many people as they possibly could get on at one time. I know we hit over 7,000 and then for the All For One Ride, they had way over that. They’ve broken records before where it’s been double-digit thousands, 11,000, 15,000 people on a ride. I don’t think that’s an issue. I will say that there was a lot of jumping around and the leaderboard was a joke those days. If that’s where they see it going, that’s the growth that I feel that Peloton is like, “If we’re going to have that many people in a ride, we need to continue to put money into making sure that they have a smooth ride when it occurs.” I also think that you’re going to have more and more instructors because I’ve been told that they’re looking for as many as 32 instructors in London. That’s over Tread, yoga and the Bike. The point being that if you add that many new instructors to the schedule, you’re going to have multiple opportunities to ride a bike live, at the same timeline.

As long as they can keep the user experience where it is, I don’t see any reason why they can’t keep adding people. I espouse the coolness of Peloton all the time to anybody who will listen to me. As long as they keep that customer experience feel, as they continue to grow, they’re going to do fine. That’s my opinion. They’ve got a product. As you were saying, I was shocked about the low rate of the churn of subscriptions because in getting ready for this, I looked up, “What are some other statistics that fitness companies look at?” If you’re LA Fitness or Gold’s Gym, you’re losing 30% to 40% of your subscribers every year and they’re only losing 1%. That’s a shockingly low number for me.

Every business that operates in more than one country has foreign currency risks. Click To Tweet

That means the people that are buying the product, not to say that that might not go up in the future as they expand their market and more people join on and that number might go up but to start at that low number, is a good thing for them. Over time, it doesn’t cost them much more to say 5,000 riders to connect a ride as it does for 10,000 riders to connect to a ride. Over time, that subscription number is going to get much bigger and I expect that margin to get bigger. If they can keep those people sticky to their product and not canceling their subscriptions, that’s going to unbelievable moneymaker for these guys.

That’s what I feel people who are writing these articles talking about the IPO don’t get. That’s what they don’t get because they don’t ride the Bike. People aren’t leaving Peloton because Peloton is a different kind of company. Peloton is not in it to make money. They want to make a profit. They want to be a big deal but there are things that they focus on that no other company in the world focuses on. I have never had a company send a handwritten note to me and Peloton has. They’ve done it for numerous other people. When you go into the studio, the instructors take the time to meet you and they talk to you. That has never been the case for me. You’re just a person when you go into a gym. They truly care about the people and I believe that. I don’t think that these other people valuing the company looking at these options, I don’t think they get it. They think, “It’s another flash in the pan.” I feel they’re missing the boat.

Part of it might be that they don’t know where to put Peloton. One of the guys on a CNBC or something was reading, what Peloton is? They list 6 or 7 different things. We’re a software company. We’re a customer company, we sell products. I don’t think they know who to peg and compare Peloton to, because there’s not another company out there that’s doing what Peloton is doing.

That’s right, which is why I don’t see why it’s not obvious that they’re amazing.

If you’re not utilizing it then you see a bike or a tread. The prognosticators like to look at similar things and say, “This is how this other restaurant chain looked when they did their IPO or what have you.” There isn’t a comparable business model to what they’ve created to look at. They’re trying to compare it to other things that they think are comparable, but the things that they’re looking at are one carved out piece of what Peloton does. It’s not a full picture.

The quote that gets me and it was the Business Insider article that I read that he said, “Peloton downplays that they are essentially a bike company.” They’re not tough. When they say that they’re a tech company and they say that they’re a media company, it’s because they are. They’re not just a bike company. If they were selling a bike, we would not be having this conversation right now.

That is infuriating because it’s myopic to discount the hundreds of hours of content that they create monthly and say, “It’s just a bike.” They’re not creating content. It’s not a media company. What else is your definition of media? Especially, I would even get this a few years ago before streaming television had completely disrupted an almost 100-year-old industry. Now that it has, why can’t you see that they’ve created a new streaming television ecosystem within the streaming television ecosystem that’s only two years old? It’s jaw-dropping that people can’t see it. These stories are, might be apocryphal, but the stories about when the Mayflower was coming over and the Indians didn’t even see the boats because it was so much an alien concept that their mind couldn’t process it. It’s what this feels like.

You see the value in Peloton when you see what other companies are doing. You’ve got LA Fitness and Gold’s Gym and all those people, they’re trying to come out with their streaming exercise classes. They’re doing that to try and combat Peloton.

They will fail because they essentially do not get what Peloton is doing differently. They are going to fail because they’re not building a community. It’s not the same. That is not even all Peloton. The community was built from the fact that Peloton listens. They had a huge part of that but even the instructors did that. Jenn Sherman is the cornerstone of building this community because from day one, she has been saying, “Susie, you’re always in my class and I’m glad you came back.” When you take a Jenn Sherman class, you learn about the other people in the class and you see them on the leaderboard week after week. You connect with them even if you never talk to them because you see the same people over and over again and she’s drawing you together by pointing that out. Other instructors, they all have their way of approaching it.

She created that template.

She did. She was their first instructor. If the instructors were not doing that and the community did not make their own Facebook page because they created it and Peloton took it over, then neither of these things would’ve happened. It was the perfect confluence of events and Peloton didn’t mean to create it, but they did. They embraced it. None of these other companies can come close to that. It is impossible to replicate.

TCO 121 | Peloton IPO

Peloton IPO: Peloton needs to stop spending money on the growth, which is its own danger, too, because they’re trying to be a first mover.

 

It would take years for them to do it. It’s similar to the Marvel, DC thing has Marvel created this amazing universe over ten years before they gave you something like Avengers End Game. DC wants to do it right now and they keep brushing it and they keep putting out substandard products. That’s what you’re seeing. Whenever I see a gym that’s like, “We’re going to have our streaming fitness classes.” Three words come to mind, Blockbuster to-go. It’s the same thing. They’re playing catch up and they’re doing it poorly and they’re missing the point.

You don’t go into an LA Fitness and there’s no Matt Wilpers instructor at any amount that says or Denis Morton or Christine D’Ercole. There’s not that type of talent in their instructor base to even videotape and stream.

When they get one, Peloton will poach them. They’re serving as the minor leagues for Peloton. I guarantee you, any instructor in one of those gyms right now fantasizes about the day Peloton comes in and spots them.

That’s the other thing that I mentioned about maybe the instructors being a risk to them until there’s another product. If you’re a spin instructor, I would say at this point, Peloton is the pinnacle of the place you would want to work. Until there’s another company out there that is leading or is giving a Peloton a run for its money, Peloton is going to have its pick of people.

Which this also goes back to the potential of poaching instructors. That’s going to be difficult because as someone wants to become the upstart and challenge them, there will be this whole subset of instructors chomping at the bit to be the next Denis Morton, be the next Matt Wilpers, be the next Christine D’Ercole or Jenn Sherman or whatever. That’s the goal. They’ve created a goal, a pinnacle for that industry that didn’t exist years ago.

Do you have any feeling where they’re going to set their IPO price?

I’m on the front page of the statement. In the statement, there are a whole bunch of blanks because they haven’t figured it out exactly. On the front page of the statement, they say they’re looking to raise off $500 million. I have a feeling that the number is low because that was the investment that was made on their last Series F round. Peloton is already pulled in over a billion dollars in financing to get the company to where it is. The IPO has got to be bigger than that I would think. The market and the underwriters are going to price the stock at what the market will demand that day because they want to get as much money as they possibly can in the Peloton hands by this IPO.

They’re not going to undersell the market. They’re not going to oversell the market. Peloton could go to the market pretty quickly. Uber, once they released their statement, went public 30 days later and that’s been a disaster since then. Peloton could reasonably go to the market quickly. I don’t think they have to. They’re not in that great of a need. They’re in a much better position than a lot of the IPOs we’ve seen come out this year. There’s going to be a big demand for the stock if people understand it, as we understand it, there will be. The stock price could be shocking depending on how many numbers of shares they decided to issue and how much they were looking to raise that. At this point, I couldn’t tell you what the stock price or how many shirts they are going to sell that day.

When they estimate that they want to raise $550 million in their IPO, is it possible that they deliberately low ball bet number so when they go past it, it looks better? If they tell people they’re going to raise $1 billion and they raised $990 million, people are going to be Nelson Muntz on the Simpsons. If you tell people $550 million and you’re raising $750 million, you’re a rock star. Is that even a possibility or are there formulas in place in-laws that prevent you from playing that game?

When they start filling out those blanks, we’ll get another one of these statements before the IPO happening, which will dictate exactly how many shares are selling. As you get closer and closer to the IPO date and the underwriters are making the presentation to Fidelity and all these other companies that are going to buy some stock on day one, they’ll get a feel for what the stock price is going to be. Leading up to it, they’ll have a good idea of what the true market out there is. They’re not going to oversell it and they won’t undersell it. They’re not going to set the stock price high that they’re not going to sell out the block of shares are going to sell release that day.

They also don’t want to undersell it because they want to hit that sweet spot to where the economic X happens, where supply meets demand. That’s where they’re going to shoot for that specific day. They will have like, “We’re planning on selling many shares, but the underwriter will have the ability to essentially oversell the block by many units if the IPO was going that well that day.” That could be a pretty significant demand for this company. What you don’t want to see or the company is trying to avoid is the Uber scenario.

There's not another company out there that's doing what Peloton is doing. Click To Tweet

They come out super hot and then their stock price tanks for the next 3 or 4 months because they’ve got a bunch of unresolved issues they went to the market with. That’s what they’re going to try to avoid is they’re going to try to hit that sweet spot of what the stock price is that they can continue to support as they continue to release information because once they go public, we’re going to start getting quarterly results. We’re going to see how many subscribers they added in the last quarter. We’re going to see what the churn rate is of those subscribers and the stock price is going to move based on those numbers.

Do you have a price in your head that you think would be a good deal? I don’t even know if that’s a fair question to ask. I’m not trying to put you in the spot.

No, I would assume that they’re going to shoot for something that the average person could buy. They’re not going to shoot for an outrageous stock price like Amazon where you can’t get in unless you have $2,000 to buy one share. They’re going to shoot for a price that most people if they wanted to go out and get a couple of shares, they could get a couple of shares. I imagine that the stock price will end up somewhere in around $50 to say $100 per share because that’s what they want to be able to get the biggest market they can. That’s why companies do stock splits and stuff is because eventually, their share price gets so big that the average Joe doesn’t have $2,000 to buy a share of Amazon. They split the shares into five and suddenly, they can afford one of those shares.

It doesn’t happen so much anymore because there are a lot fewer individual investors out there buying shares in their stock portfolio. It’s mostly done by computer, indexes or whatnot. I would say I wouldn’t be surprised to see a stock price somewhere around $50 to $100. In my mind, it’s not so much what the share prices, but it’s how much risk am I willing to put towards this and my personal financial life. If I’m willing to completely lose $1,000, if the share price is $50, I’ll buy 20 shares. It doesn’t matter what the share price ends up to be. It’s more about, how much am I willing to put at risk to own a couple of shares of Peloton? I’ll be honest, I’m probably going to buy a few shares because I had this story that I keep going back to.

I have a client who his wife became disabled on the job. She was at home most of the time and he noticed he’d come home from work that there would be Amazon boxes on the porch and he’s like, “This is a great idea.” It’s hard for my wife to get out. She can order off Amazon. These boxes are showing up, they’re showing up more frequently. This was before Amazon was a thing. He’s like, “This makes sense.” My wife’s figured it out and she’s not a technology person. More and more people are going to figure this out. He’s like, “Yeah, I’ll take $1,000 and buy some Amazon stock. We’ll see what happens.”

That Amazon stock is with that thousand dollars she bought is worth a lot. Peloton could be that next Amazon. I’m probably super biased in this because I have one, but they’ve definitely onto something and they’re doing it the right way. Their financial statements, even though they’ve lost some money, there’s a lot of good stuff in there. A lot of stuff that they should be super happy about and be proud to go to the market with. It’s not something where I’m like, “I’m taking a flyer on this one.” That’s stuff to back up their hype.

It seems like once every generation there’s a product or a service that comes along that people don’t understand unless they’re personally interacting with it like your Amazon story. I feel like this might be that. We should probably in closing say, “This is conjecture and please don’t run out and make decisions.”

Talk to your financial advisor or get one, don’t make investment decisions based on what we said and do not overspend and do something that you cannot afford, please. Don’t come back here if you did. 

Mike, where can people find you on social media if you would like to be found?

About the only social media thing I do is Facebook, Facebook.com/MJurenka. Though if you friend me and I don’t know who you are because I find that a little creepy. I’m a member of the Peloton Data Junkies group and the Power Zone Pack group. I’m on your Facebook page. I like to comment and help when people have questions. That’s where I’m at. My leaderboard name is a MapleBar_Fueled.

Why? I could ask that now.

Originally it was MDJ_CPA, which was my initials and the fact that I’m a Certified Public Accountant but then my friends who have a Peloton bike were like, “That is the most ridiculous leaderboard name ever.” First of all, it’s hard to say for a call out. Nobody’s going to try and say that, though Ben did on my 50 rides. I got that. They are like, “You’ve got to think about, where did you go to school? What do you like?” I’m like, “The reason I am the way I am is probably because of maple bars?” That’s one thing. I’m in the search for, it would, Tom and this chicken. I’m scouring the country or whatever for the best hamburger and the best maple bar. That’s where it came from.

Mike, thank you so much for taking the time to do this and walking through all this with us. I appreciate it. It’s nice to get a perspective. I always like people to agree with me, but I feel like this was a discussion rather than the horrible things I’m reading online.

Thank you so much for taking the time out of your busy day.

Thank you very much. If there’s ever anything we can do for you, let us know.

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About Mike Jurenka

TCO 121 | Peloton IPOMike has been a Certified Public Accountant since 2006. Mike earned a Bachelors of Science in Business – Accounting and a Masters in Professional Accountancy from Montana State University in May 2005. Following graduation, he moved to Seattle and spent the first five years of his career working for Clark Nuber, PS, in Bellevue.

Mike’s areas of expertise include commercial and individual income tax, as well as international tax. His strongest expertise is working with closely held businesses and their owners on tax issues that arise throughout the course of running a business. He consulted with clients at Clark Nuber on accounting for income taxes for large private and smaller publicly traded clients. Assisting several clients with the implementation and adoption of FIN 48, Accounting for Uncertain Tax Positions, is another area Mike excelled.

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