In this episode of MarketFoolery, Mac Greer talks with Fool analysts Emily Flippen and Andy Cross about today's business news. It's a bad time to be in the vape industry or anywhere close to it, as Juul and Altria ( MO 0.51% ) are seeing today.
Emily shares what this could mean for the cannabis industry both in the short term and years down the road. Peloton ( PTON 5.21% ) finally is a public company, and Andy shares the bull case for the exercise-and-subscriptions provider. McDonald's ( MCD 1.89% ) is getting in on the Beyond Meat ( BYND 1.66% ) game, but the market is rewarding Beyond Meat much more than McD's for the move. Tune in to learn more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 24, 2019.
Mac Greer: It's Thursday, Sept. 26. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by Motley Fool analysts Andy Cross and Emily Flippen. How are we doing?
Emily Flippen: Hey!
Andy Cross: Doing great!
Greer: Good. We've got lots to talk about. All of this is playing out against a backdrop of impeachment inquiry hearings on Capitol Hill. The good news is that we're not going there. We are not a political show. If you're looking for your political news, plenty of other outlets.
Cross: Not us.
Greer: Not us. We're going to keep our focus on business and investing. Along those lines, we've got some big stories. The Juul CEO is out. The Altria-Philip Morris ( PM 1.12% ) reunification is off. And it's on for Beyond Meat and McDonald's, doing a little experiment with a Beyond Meat burger, the PLT. You'll just have to listen if you want to know what the P stands for.
Emily, you're making an expression. You don't like the name?
Flippen: [laughs] I hate the name!
Cross: Me too. Bad name.
Flippen: I like the concept. It's obviously playing off of BLT. But "P" stands for plants.
Greer: You just gave it away!
Flippen: I know. The idea of being a plant, lettuce, and tomato makes it sound like lettuce and tomato aren't plants, right? It begs the question, what else is in your burger?
Greer: That's true.
Cross: That's a good question. What else is in that burger? We'll talk about that.
Greer: I always felt bad for the lettuce and tomato, man. What are they?
Cross: They already get second fiddle right in the sandwich. Now it's even worse.
Greer: [laughs] Well, we'll get to that. Let's begin with the Peloton IPO. Peloton, making its Wall Street debut. Peloton is a digital fitness company. What that means, Andy, is they sell the equipment, like stationary bikes and treadmills, and they also sell subscriptions to their exercise classes. Peloton priced shares at around $29. That gives it a valuation of north of $8 billion. Andy, what do you think about the IPO?
Cross: Some background here. The stock hasn't traded as we're taping this, so we don't know where it'll finish. I think it'll actually be a very well received IPO. I think the folks at WeWork are pretty excited that this one is coming public because it gets them off the front pages a little bit. The ticker is PTON. Peloton, for those cyclist fans like me who follow cycling, it's named after that. It's a fitness company. Although, Emily, they talk a lot in their filings about, "We're a technology company. We're a media company. We're a fitness, not exercise, company. A fitness company. We are community." Basically, you can buy into their products, which are a cycling bike and a treadmill, first a bike then a treadmill; and, you can also join into their subscription platform and a community of users. Basically, you can get on the bike, don't have to go to the gym, get on the bike and the treadmill, you have your screen there, you can see your live classes, you can join in. They have more than 577,000 connected device subscriptions. It's $40 a month if you join that. You can also just get a digital subscription if you don't want the actual hardware for $20 a month. Like you said, Mac, the valuation when they go public, $29 a share at 40 million shares, gives them a valuation north of $8 billion. I imagine it'll be higher than that today.
It's an interesting company because it's a consumer facing company. It's not one of these tech companies that are so focused on the business-to-business. This is a business-to-consumer company. It's founder led by John Foley, who was formerly of IAC. He owns more than 6% of the stock. It's a really interesting business because it is this hardware and subscription business.
Greer: We should mention, the bikes are not cheap, right? We're talking about a couple grand.
Cross: $2,200 on average for the bikes. The lifetime value, they talk about, for those members. Just to be clear, you can buy a subscription, and then it's for your whole household, Mac. You can have it, your wife can use it, kids can use it. They have 1.4 million users. That's anyone with a Peloton account. And they have more than 500,000 paying subscribers, and then a 102 digital subscribers. The paying ones, that first number, is you have the connected device, so, you have the hardware, too. It's interesting because, of all the equipment they've sold, more than 92% still have a subscription tied to it, and that's since they founded the company in 2012. Many years. They still have that subscription component. So far this year, it's been 58 million workouts, and on average, it's 11-13 classes per month that someone does.
Flippen: If I'm paying $4,000 for an exercise bike or treadmill, sure as heck I'm going to subscribe to the people providing it to me. I feel like the negativity for Peloton, at least as I've seen thus far, has been caught up in the idea of the traditional sense of, exercise machines just sit in your house unused, end up at garage sales, are sold to Goodwill for cheap, because nobody actually exercises --
Greer: NordicTrack. That's what I think of.
Cross: NordicTrack has a new competing offer to Peloton. They're out advertising it very aggressively.
Flippen: Exactly. I think the fact that these are so expensive makes their market a little bit smaller, but I think that makes that market very sticky. And, the fact that they have subscription-based revenue, a platform -- I really do think there is a platform with Peloton, I think it makes it compelling. Again, we don't really know the price. It could be absurdly priced at the end of today. But I just think the business itself is really interesting.
Cross: It's interesting, I think Planet Fitness, which owns a whole bunch of gyms, a very discounted price, the membership's like $10 or something. Very reasonably priced. I think the market cap for Planet Fitness is around $6 billion. So, you're talking about a larger organization in that. But Emily, you're right, they talk about a very bold, large target total addressable market of millions of people. There are more than 60 million gym memberships in the U.S. alone. They talk about these very bold numbers and how they have a very small fraction of that. But you're right, it's a very expensive piece of equipment. But that's the real attractive part to tie in with the subscription offering. The subscription offering is fairly profitable for them.
Now, they are not making money. They are spending a ton of money on building out their sales platform, building out the studios where they tape all these classes. They make more than 950 programs per month that they then put out to their members and users. On average, 6,400 their members attend the class. They have to produce the classes, so they're a content organization that way. Then, you join the class and watch it on your screen, either live or on tape, and you go through the workout.
Flippen: I can tell you like it so much, Andy.
Cross: I think it's a very interesting component. Again, it's business to consumer. I'm a cyclist. In honor of Peloton, I have my Tour de France shirt on, today.
Greer: It's a Charlie Brown yellow, for people who can't see.
Cross: It is.
Greer: It's a handsome Charlie Brown yellow.
Cross: Thank you very much! It doesn't have the brown part, but it has the yellow part. For the maillot jaune, the yellow jersey. I have my yellow cycling socks on that people can't see --
Greer: This is making great audio.
Cross: It is.
Greer: Keep going. Do you have a pie chart?
Cross: No, I don't. Back to some numbers. The lifetime value of a member is somewhere between $3,500 and $4,000, for the connected people who bought the bike. The cost to acquire those members, it's expensive, but the lifetime value, you can see that playing out because of that subscription. So, that really gives them, hopefully, a nice, sticky business. We'll see how it plays out relative to the company's valuation.
Greer: Let's finish with the stock. If you're watching this IPO, what are some things you should be asking yourself before you decide to buy?
Cross: I don't know where the valuation is going to be. I'm just guessing it's someplace around 15X or 20X sales. They're doubling sales every year. They're doubling their member base. They're growing very rapidly. They're spending a lot of money. Like many of these technology media companies that have become public in the last few months, it will be expensive relative to traditional valuation. What I want to see is where the stock prices. I want to see them continue to add those members. Those members, as they grow from 500,000 to a million members, and they grow their revenues past a billion dollars -- they're going to cross the billion-dollar mark -- they have to maintain those growth rates to justify that valuation.
Greer: Let's talk vaping. The CEO of e-cigarette maker Juul is out and has been replaced by an executive at Altria. That would be the same Altria that owns a 35% stake in Juul. Juul has also suspended its advertising and says it all back the Trump administration's regulations on e-cigarettes. Emily, as I mentioned, Altria paying $12.8 billion for that 35% stake in Juul back in December.. Was that $12.8 billion too much?
Flippen: I definitely think $13 billion for a company that as of right now may not have much of a business in the United States might in hindsight have been a little too much. As you mentioned earlier, we don't get political in this show, but this issue seems to be getting a little political, doesn't it? In my opinion, there's two sides what we're seeing happening with Juul and the vaping crisis, you can put it, here in the United States. The first one revolves around health issues. This is a moving target that changes every day. I think, as of yesterday, 10 people have now been confirmed dead from vape-related illnesses, and they're not sure what's causing it. They have no idea. Some of these people were using vapes for nicotine, some just CBD, some marijuana. It's really unclear what's causing these issues. Now, there's lots of theories out there, whether it be vitamin E or black market drugs, the vape themselves, all of these. The government's floundering right now. The regulations that we see come out on the federal level, at least, have been targeted toward flavored Juul pens. This is really different because it's not the flavored Juul pens that are causing the health crisis that we're seeing right now. It's vapes in general. But, the flavored Juul pens are targeted toward kids. So we have these two regulations coming out. One saying, "We need to prevent these devices from getting in the hands of kids, and flavors appeal to kids," and one saying, "Wait, are these devices actually killing people? Do we need to do something on a federal level to get rid of them entirely?"
So, this proposed merger between Altria and Philip Morris -- it's a remerge. The companies were combined back in 2008 before being spun off. The fact that that fell through, I think, is a testament to the fact that Philip Morris still has a relatively stable international tobacco business. Altria, at this point, sees declining tobacco sales in the United States and a potentially devastating investment into the vape company Juul. So it's not great right now.
Greer: Let's talk about that. When you look at Altria, the stock, shares and lost around a third of their value over the last 12 months. The stock is down over the last five years. If in five years from now, Altria has outperformed the stock market, it's done much better than expectations, what happened?
Flippen: I don't think that's going to happen --
Greer: It's a thought exercise, work with me.
Flippen: [laughs] Altria's core business is declining. Altria has some interesting investments into things like edible nicotine. Let's pretend for a second that edible nicotine takes off. That could maybe save the company. They're much smaller investments than the $13 billion they put into vapes, though. So, it would require vapes, all of the reports coming out saying that it's causing illnesses and deaths, need to be debunked. But I'd also expect, these smaller investments in things like edible nicotine would need to start to pay off.
Greer: OK, and I want to ask you one more question. You follow the cannabis industry.
Flippen: [laughs] It's been a fun month for me.
Greer: When you look at all of the vaping news, and the fact, as you mentioned, this is a dynamic story, we don't know what's behind these deaths and these health concerns exactly-but when you look at the vaping story, what does it mean for the cannabis industry?
Flippen: It means a lot. Virtually every cannabis company out there has some exposure to vapes. If not directly, the main way that people consume cannabis is through vaping. What it makes me think about the industry is, long-term this will eventually blow over. But I get really excited about the extraction industry, the companies in the cannabis space that are actually working on the scientific process of extracting cannabinoids from the marijuana plant. That allows them to put it into things that don't require vapes to be used -- topicals, edibles, drinkables, whatever that might be. It makes me really bullish about that sector of the industry.
But as I said many a time, this is an extremely volatile, hard industry to be in right now.
Greer: Let's close with some big news from Beyond Meat. Shares of Beyond Meat up more than 10% at the time of our taping on news that McDonald's will test a Beyond Meat burger in Canada. The burger, as we mentioned earlier, will be calling PLT. Plant, lettuce, tomato. I kind of like that. We can talk about that. It'll be sold in 28 restaurants around Canada starting September 30th. It's a 12-week trial, only a few months. Shares of McDonald's up only slightly on the news. Emily, I'm a McDonald's shareholder, am I the only one excited about the PLT?
Flippen: I know I'm personally excited. While Andy might be on his Peloton bike getting a good workout --
Cross: [laughs] I'm excited!
Flippen: Well, I might be up in Ontario sitting at a McDonald's doing what I do best -- eating burgers. As a new vegetarian, I'm personally excited about this. Maybe McDonald's shareholders aren't rejoicing as much as Beyond Meat's shareholders may be, I still think this is a strategic move for McDonald's. They're just testing it, as you mentioned. Very early stages. I will say, I think part of the reason why we're not seeing the rally at McDonald's, McDonald's is a challenging business in the sense that it's virtually all franchise owned. They've had issues in the past in getting their franchisees on board with company improvements. Now, do I think franchisees are going to turn their nose to fake meat products? Probably not. But it was just earlier this year, a month or two ago, they were sending letters to McDonald's corporate offices, saying, "We need a chicken burger." McDonald's wasn't quick to jump on that. But they're being relatively quick to jump on the fake meat or meat alternative market. I'm bullish on the fact that they may be able to roll this out internationally, here in the U.S. and allow me to try it.
Cross: Yeah. We've talked about this -- if you think about how the market will be evolving over the next 5, 10, 15, 20 years, Beyond Meat whether it's a health option or not, just the fact that it's an alternative. Franchisees, McDonald's, they have to drive their same-store our sales, and they have to get more and more people coming into their restaurant. If they have an opportunity to offer something that's maybe a little bit differentiating, test it out in the market, see how it goes. And, like Emily mentioned, if it's great, roll it out. Come down here. Get on our Peloton, have a little PLT.
Greer: It just rolls off the tongue, PLT.
Cross: Name aside, I think it's encouraging to see a company McDonald's at least test this out. Others are doing it. They got to be competitive. We'll see how it all plays out for the franchisees.
Greer: I want to talk Beyond Meat. It's valued around $9 billion. The stock up around 600% since it IPOed in May -- in May, people. Is there a Beyond Meat bubble?
Flippen: We saw a Beyond Meat bubble --
Greer: It's down a little, but is there still a Beyond Meat bubble?
Flippen: My gut wants to say yes. The valuation on it for the sales, it looks absolutely insane. But then I think about it, and I think about the way that they're, in my opinion, revolutionizing a lot of this space. And it's easy for me to say -- like I said, as a new vegetarian, I appreciate the work that they're doing.
Greer: Are you a flexitarian?
Flippen: Well, I don't feel like they're targeting vegetarians. I don't feel like they're targeting people who eliminated meat. I think they're targeting flexitarians, people who are just trying to consume less meat. And that's a huge market. If you do believe that that's a genuinely big market, then it makes that valuation look more reasonable. Personally, I'm not sure the way to get to the flexitarian is to name burgers "plant, lettuce, tomato burgers." That's not appealing to me. But, McDonald's may prove me wrong.
Cross: Burger King is doing the Impossible Whopper. That to me sounds much more attractive.
Flippen: Beyond Fried Chicken, too. PLT, without understanding what the P stands for.
Greer: People don't want to eat plants.
Cross: No, people like plants. Well, not everybody.
Flippen: Flexitarians want plant.
Cross: Well, to the Beyond Meat bubble, clearly there was. I think there still is. I'm not rushing to buy into the stock, even though I love the market opportunity and the way they're going about that. I will say, I was negative on Beyond Meat sandwiches before they came public. I had them, I did not like them. I tried it again maybe two weeks ago and I have to say, it was pretty good. I liked. It was good. I'm a little bit more excited about how they and others are going to evolve that space and serve a different -- flexitarians, vegetarians, whatever it might be. And like I said, over the next 20 years, the market will be moving that way. I just think there's too much excitement around the stock. Too much excitement around the business. Let it die down. We've already seen a little bit of that. The whole IPO market has pulled back. I just think it's still a little bit too much froth, too much sauce on that patty right now.
Flippen: Should we stop talking about it? The more we talk about Beyond Meat, I find myself more bullish every time. Every single time I come back to MarketFoolery there's some new thing for Beyond Meat. The first time we covered it, eh. But the more I learn about it --
Cross: They won't be the only one.
Flippen: That's true. In my opinion, the Impossible Burger is far superior to Beyond Meat.
Cross: Me too, I like the Impossible a lot.
Greer: I'm going to defend the PLT one more time. And here it is. Ready? PLT. Reminds me of BLT. And when I think BLT, I think bacon. I love bacon. So I love the PLT. It's the transitive property, I think.
So, the desert island question. You're on a desert island for the next five years and you have to invest in one of these stocks. We've got Peloton, let's throw in Altria and Philip Morris just to make it interesting, McDonald's, and Beyond Meat.
Flippen: Quite the collection of companies there.
Cross: I can't say Peloton because I don't know where the stock's trading. Of all those, I'll go McDonald's. I'm going to go McDonald's.
Flippen: I wouldn't touch Altria or PMI with a 10-foot pole. That immediately eliminates those. I find myself torn because I don't want to be on record saying I'd buy Beyond Meat. With that in mind, with the fact that I'm being recorded right now -- and 10 years down the line, someone could play this back for me -- I'm going to say McDonald's to play it safe.
Greer: A big win for McD's. I just had this epiphany recently that I love McDonald's French fries, but they have the shortest shelf life. Have you ever had cold McDonald's French fries? They're awful.
Cross: How long?
Greer: Like 10 minutes. I think they lose all their charm.
Cross: Disagree. I'm short that comment. I don't mind them.
Greer: Peloton has changed you.
Cross: [laughs] I tell you, it'll be fun to watch that stock in the next couple weeks, see where it trades.
Greer: Yeah, really fun. Heads up that we're running our Smarter Happier and Richer contest over on our Instagram page. So head over to our @MotleyFoolOfficial Instagram account and look for a photo of Foolish swag. To enter, you have to answer the question correctly and tag a friend in the comments of the post. If you win, your friend wins too. We've got 10 Foolish caps, T-shirts, and signed copies of our Motley Fool investment guides as prizes. How great is that?
As always, people in the show may have interest in the stocks they talked about, and The Motley Fool may have formal recommendations for against, so don't buy or sell stocks based solely on what you hear. Andy and Emily, thanks for joining me. That's it for this edition of MarketFoolery. The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening and we will see you tomorrow!