The TSLA Market / Economy

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8910

Peloton announced their 4th quarter results this morning. I think the best way to describe them is to just quote the opening paragraph of the shareholder letter:

Dear Shareholders,
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.

I’ve never been a CEO, but I’m pretty sure I wouldn’t want that to lead off any letter I ever wrote.

The results are truly terrible:

  • Total revenue declined by 27.6% compared to the same quarter in the prior year.
  • Gross profit is negative. That’s GROSS profit, not net profit. Cost of sales is greater than total revenue.
  • Their net loss for the quarter was $1.2 billion.

As a Peloton enthusiast, this makes me nervous - I want them to stay in business. But I think there’s reason to be cautiously optimistic, because the overall company comprises two very different segments:

  • Hardware (bike, treadmill) sales
  • Subscription revenue (monthly fees for using the service)

and if you look at those two segments separately, things gets a little different, and you start to see a path forward:

  • Hardware sales dropped by 55% over last year
  • Subscription revenue increased by 36% over last year
  • Gross profit margin on hardware is an incredible -98.1% (that’s a negative 98.1%, truly terrible). But gross profit margin on subscription revenue is 67.9%.
  • That huge inventory they were carrying at the end of last quarter has declined from $1.4 billion to $1.1 billion.

So if I’m the CEO, what I’m thinking is something like this:
“As an overall company, we are performing terribly. But there are two pieces of this business - a hardware business where we have no particular competitive advantage that is bleeding us dry, and a subscription business that continues to experience healthy growth and that is very profitable. We need to do everything we can to gently separate the hardware business and its associated costs, while we focus all of our energy on maintaining the amazing subscription business.”

That’s kind of what they’ve been doing? They recently announced that they’re exiting the delivery side of the business completely, and just yesterday they announced a partnership with Amazon, where they’ll sell Peloton hardware through Amazon. That seems like a very smart way to bleed down your still-large ($1.1 billion) hardware inventory without incurring the costs of operating the retail showrooms. (I visited a showroom to check out the tread before I bought it. It was a ghost town, and I have to believe that those showrooms were terrible investments.)

Overall, I think I’m more confident about Peloton’s survival than I have been for a while. But still not that confident. And definitely not confident that equity holders will survive intact - a Peloton bankruptcy with someone like Nike or Amazon acquiring the digital content wouldn’t be that surprising.

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8911

How is a -98% gross margin even possible. Good lord. And their hardware is expensive!

Separately, my wife re-joined their subscription and my mind is blown at the cost: $40 per month! That’s objectively insane!

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8912

Insanely cheap?

8913

Amazon arguably operates at a negative gross margin on their product sales, which was surprising to me when I realized it recently:
image

(It’s hard to be confident that this is right, because I assume there’s a ton of cost allocation going on here that might distort a simple product sales vs. cost of sales comparison.)

You just have to want it bad enough. In this case, they wrote down a bunch of inventory and are also including the costs of delivery, which they’re famously terrible at. There are a tons of stories on facebook about how treadmills especially are taking 3 or more technician trips to get properly installed/set up. I think they’re also still experiencing the cost of Tread+ recalls and including that in cost of sales.

I would say that the original bike is reasonably priced. The tread was borderline reasonably priced when I bought it ($2,400 or so, free delivery, plus some free weights and whatnot), but is now incredibly overpriced at $3,500.

Here’s where I really disagree. I think there’s incredible value at $40/month. Or at least there can be incredible value. You get multiple user subscriptions for this price, and the content is really good. I’ve been a subscriber for about 18 months and have absolutely no regrets about the monthly fee. My wife and I both use it regularly, so the comparison is $20/month per person to whatever you might pay at a gym.

8914

No price hike in the U.S. Funny, I just saw someone buying a PS5 at a Best Buy on Tuesday, so I thought maybe the supply chain issues were getting resolved.

8915

Just sold all of my SIGA at $19.12. WHO reports cases are dropping, and that makes it more of a gamble on cases going back up than a fundamental play. I do think there’s a chance that cases go back up, so I’d buy again at a lower price that has more current fundamental support - around $14.25.

+77.85% vs the S&P’s 6.77%

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8916

Maybe there’s an opportunity to buy stock in whatever company sells children’s leg braces :(

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8917

I hope it doesn’t come to that… I did look into the polio vaccine manufacturers and it’s not really an investible event, the companies are too big for this to impact their bottom line (in the event that a bunch of adults get a booster).

8918

Megan McArdle has an MBA from the University of Chicago, and she can’t understand financial statements.

https://twitter.com/asymmetricinfo/status/1562805938729676801?s=20&t=eN_lbXs8KzuAbZYQUBTfRA

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8919

And small caskets.

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8920

It’s more cost effective to toss a bunch of dead children into one large casket.

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8921

That’s some great inside the box thinking.

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8922

peloton seems like the classic case of not understanding the only reason anyone was buying your crap was b/c they were stuck indoors

$40/month for that subscription gonna be the first thing that’ll be cut if people actually did that sort of thing, but they don’t.

8923

Peloton is also kind of a stepping block for amateurs in fitness. I’d imagine that a lot of newbs who got a Peloton and stuck with it and saw the benefits of fitness would find themselves venturing into either areas of sport and fitness. I mean, riding a bike gets you pretty damn conditioned at bike riding but not a whole lot more. I’d imagine if you’re still interested in paying the money you’d start to look at other areas and find better things. But people do start to focus more on physical health during recessions.

8924

I basically get the Peleton business model at some level. Having a coach/trainer push you on works in real life, people pay money to have a guy yell at them while they cycle at the gym. $40 a month is snake-fucking crazy, tho.

8925

$40 is like 3 days worth of coffee for half the country.

8926

How the heck is $40/month crazy? If you actually use it at least a couple of times a week it’s insane value. It’s only crazy if you don’t use it regularly, which is admittedly most people.

8927

Maybe I’ve been living in the Midwest too long where things are cheap; $40/month to have some guy cheer me on while I’m running on my treadmill seems bonkers to me. That’s four times a basic Netflix subscription?

8928

I’ve been paying like $10/month for years for some music service we don’t even use (I think Pandora?) that my daughter signed up for, because we can’t figure out how to cancel the fucking thing. Every couple of months I try to figure it out and end up giving up. I figure some day our monthly subscriptions will just eventually consume my entire income. There is also $8 from Apple and another $12 from MS that I don’t even know what they are. Plus prolly like $30 or $40 that we pay on purpose - netflix, Amazon music, etc.

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8929

I prefer Pelotaunt.