Mad Hedge Technology Letter
October 15, 2021
Fiat Lux
Featured Trade:
(DEATH OF THE SPORTS GYM)
(PTON), (NLS), (GRMN), (LULU), (PLNT)
Posts
I hope for your sake that you don’t own a gym! — because one area that will certainly experience transformation into mainly smart products is fitness.
In the long term, this would be classified as a terrible investment, and I will tell you why.
The global digitally connected gym equipment market is projected to separate itself from the equipment of the past.
No more bench presses and barbells.
When I say smart fitness products, I am not just talking about Peloton (PTON) — though they are the trailblazer of the group.
Rising technological advancements in the fitness and gym equipment market are happening at warp speed.
Rapid digitalization of the health and fitness industry along with the increased utilization of smart machines is making products better and more efficient.
There are advantages for the consumers like storage, monitoring, and analysis of their fitness performances and the ability to log these details for future references.
New platforms will start popping up that integrate gym equipment and sports equipment along with the training and coaching software.
My personal favorite is Tonal.
This machine is ingenious and uses its smart cable machine to perform strength training exercises.
It’s essentially a 24-inch iPad plastered on the wall with cables and is the Tesla of the smart gym industry with onscreen coaches that guide you through your workout.
Tonal’s AI automatically adjusts weight based on a user’s strength during workouts. Rather than physical weights, Tonal uses electromagnetic force to produce up to 200 pounds of resistance.
Artificial intelligence (AI) is there to track everything you do, analyze it, and decide what you're going to do next, so you end up getting a much better workout, in a shorter amount of time, in the convenience of your home.
With precise data measurement, Tonal can measure the quality of every single repetition, decide how much weight one should lift, and adjust weight in one-pound increments.
To visit their website, click here. (https://www.tonal.com/)
Treadmills are anticipated to hold the largest revenue shares of the market and dominate the market segment on the account of rising instances of cardiovascular diseases.
Strength training equipment is expected to rapidly increase sales by the consumers as well as the increasing inclination of regular fitness enthusiasts over bodybuilding and strength building.
As for specific smart gym stocks, Peloton (PTON) and Nautilus, Inc. (NLS) had huge run-ups in 2020 as business boomed during the health crisis.
These two stocks have come back to life during the “reopening trade.” They after going through a consolidation phase in 2021, but I do believe it is a good time to buy during a low patch.
Conversely, a gym franchise stock Planet Fitness, Inc. (PLNT) had a terrible 2020 because of the mandated closures but has followed up a bad year with a sensational year as in-person gym activity has reversed.
However, I believe the situation will be quite grim in the long haul for in-person gym aficionados, as Tonal proves, gyms will migrate into the confines of our homes simply because the technology now is TOO GOOD to justify getting in a car to drive 30 minutes to the gym, spending 15 minutes changing in the locker rooms, only to then start a workout.
Tonal can almost fit in a kitchen pantry — it’s an iPad with attached cables and nothing more than that.
Its compact nature will attract many gym enthusiasts and one doesn’t need to allocate a whole room for a home gym, even a hallway can suffice with Tonal.
Tonal can get better, but I specifically thought the programmed training dialogue from the A.I. trainers were cheesy.
But it’s good enough that it lays down the marker for in-home smart gyms to gain market share in the future, which is why I believe franchise gyms will be made redundant.
Unfortunately, Tonal is a private company and Lebron James just made a big investment to buy a piece of it.
Alternatively, a direct play that I like for the smart gym is Garmin Ltd. (GRMN) who produces a variety of smart fitness products and specializes in navigation. This stock is immune to the in-person or at-home gym question because their products will get used no matter what.
A second derivative play of the smart gym is the clothes that are needed to work out.
Although not a tech stock, workout apparel stock Lululemon Athletica Inc. (LULU) made hay last year and their stock has basically moved from the lower left to the upper right for the past 10 years with minimal volatility.
So does this mean the end of the sports gym as we know it?
I am not calling for the death of gyms yet, but we have definitely started down that path albeit it incrementally and once Tonal lookalike products become a little more affordable, kiss goodbye to many people going to the gym.
Mad Hedge Technology Letter
December 16, 2019
Fiat Lux
Featured Trade:
(THE PELETON BUBBLE IS ON)
(PTON), (PLNT), (NFLX), (AMZN)
Own a Peloton (PTON) bike, but don’t buy the stock.
That is the conclusion after deep research into this wellness tech company.
Peloton is an American exercise equipment and media company that bills itself as a tech company.
It was founded in 2012 and launched with help from a Kickstarter funding campaign in 2013. Its main product is a stationary bicycle that allows users to remotely participate in spinning classes that are digitally streamed from the company's fitness studio and are paid for through a monthly subscription service.
Peloton is wildly overpriced with the enterprise value of each subscriber at $15,631.
Contrast that with other comparable firms such as Planet Fitness (PLNT) whose enterprise value per subscriber is $553 or even streaming giant Netflix (NFLX) whose enterprise value per subscriber comes in at $895.
There are three massive deal breakers with this company – software, hardware, and the management team.
The management team acts as a bunch of cheerleaders overhyping a simple exercise bike with a screen that has no deeper use case and in turn an unrealistic valuation that has disintermediated from all reality in the post-WeWork tech world.
What’s the deal with the hardware?
Some recognition must be given to Peloton for creating a nice bike and interactive classes that mesh with it. That idea was fresh when it came out.
The marketing campaigns were attractive and allured a wave of revenue and these customers were paying elevated prices.
But the bike itself has not developed and advanced in a meaningful way since it debuted in 2014 and back then the valuation of the company was $100 million.
The first-mover advantage was a godsend at the beginning, but the lack of differentiation is finally catching up with the business model and now you can get your own Peloton carbon copy on Amazon (AMZN) for $500 instead of $2,300.
Instead of focusing on the meat and bones of the company, Peloton has doled out almost $600 million over the last 3 years in marketing to capture the low hanging fruit that they most likely would have seized without marketing while competition was low.
Competition has intensified to the point that some of its competitors are giving away bikes for free justifying to never cough up cash for a $500 exercise bike let alone a $2,300 genuine Peloton bike.
The first-mover advantage when Peloton had the best exercise bike is now in the past and the company is attempting to move forward with a stagnant bicycle.
The Peloton treadmill came out much later but has not caught on and has many of the barriers to success I just talked about.
What about the case for owning the stock for the software?
Peloton is charging an overly expensive $39 per month for a “connected experience” to anyone who has bought the $2,300 Peloton bike.
But if the user happens to not buy the bike, they can download the digital app and pay $12.99 per month for the same connected experience.
Why would someone pay $2,300 for an overpriced exercise bike when they can just sign up to a full-service gym and just use the Peloton app with some headphones for $12.99 per month?
This illogical strategy means that less than 10% of Peloton subscribers have bought their bike.
Peloton’s competitors have shredded apart their strategy by essentially underpricing their bike and mentioning that they can use the Peloton app with their bike.
And even if you thought that Peloton’s live streaming fitness classes were the x-factor, users can just add a nice little removable iPad holder to the exercise bike and stream YouTube for free or any other digital content on demand.
The cost of adding an iPad holder is about $13-$15 which is a cheap and better option than paying $12.99 or $39 per month for Peloton’s fitness classes.
Users will eventually migrate towards cheaper packaged content because of the overpriced nature of Peloton’s digital content.
Is Management doing a good job?
Peloton’s CEO John Foley most recently told mainstream media that the company is profitable when it is not.
He has repeated this claim several times throughout the years as well. The company has never been profitable and lost $50 million on $228 million of revenue last quarter.
Each quarter before that has also lost between $30 million to $50 million as well, and Foley is outright dishonest by saying the company is profitable.
Peloton relies on top 100 billboard songs to integrate with their fitness streaming classes and the company just got slammed with a $300 million lawsuit from music publishers claiming they have never actually paid for music licensing.
Music is core to their streaming product and without the best songs, users won’t tune in just for the instructor.
Working out and live music go hand in hand and stiffing the music industry on licensing fees is just another example of poor management.
In March 2020, the lockup expires and top executives are free to dump shares which will happen in full force.
Management has one unspoken mandate now – attempt to buoy the stock any way possible until they can cash out next March.
This group of people is only a few months away from their payday.
There is no software or hardware advantage and management is holding out for dear life until they can kiss the company goodbye.
Do not buy shares and I would recommend aggressively shorting this pitiful attempt of a tech company.
Peloton is a $6 stock – not a $30 stock.
