Peloton? More like Pelo-yawn

In this episode of MarketFoolery, host Chris Hill chats with analyst Abi Malin about some of the most overhyped and underhyped stories of 2019. As the headline hinted, Abi explains why she thinks all the talk around Peloton (PTON 4.29%) is at least a little overblown in the analyst world. Conversely, the market's shown a total lack of love for bond market innovator Tradeweb (TW -0.30%) this year, and that seems like a mistake. Plus, Abi shares what she's going to be watching for big tech companies next year, what it could mean for Amazon (AMZN 3.43%) to spin off its AWS business, and more.

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This video was recorded on Dec. 19, 2019.

Chris Hill: It's Thursday, December 19th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, for the last time for 2019, but don't worry, she'll be back in 2020, it's Abi Malin. Thanks for being here!

Abi Malin: Thanks for having me!

Hill: Yesterday, we recorded Motley Fool Money for next week. It's our year-in-review episode. Because you're not on the episode -- that's something we need to talk about, by the way, getting you back on Motley Fool Money a little bit more often. But anyway, I'm curious, as we look back on 2019, there are a lot of things that got a lot of attention. Some, rightfully so. Other things, I think now we look back with the benefit of hindsight, and we're like, "Boy, we spent a lot of time focused on that one thing, and I'm not really sure why." What fits in that category for you? That you look back on, and you're just like, "Why did we spend so much time talking about that?"

Malin: I spent a lot of time looking at various IPOs over the year. I think the one that has gotten a lot of attention, and I still think we're in peak talking about it, is Peloton. They are a fitness company. They produce stationary bikes and treadmills. They're sold at pretty premium prices. And then they also offer a subscription to deliver high-quality fitness classes directly to those users within their homes.

I think we talk a lot about it, and I just don't think it's going to be relevant down the line.

Hill: Really? You think the business itself is that challenged?

Malin: I don't know that the business is that challenged. I think a lot of analyst concerns seem to be around the fact that the hardware so expensive. That's actually not my concern with them. I mean, I live in D.C., and I think exercise is expensive. Even basic gyms in D.C. are pretty expensive. The (Peloton) bikes are about $2,300, treadmills are $4,300, but they offer these payment plans. If you do it on a plan, I don't think it's necessarily outrageous, considering it could replace your gym membership.

I just think that there's a little bit of an overestimation of how big this total addressable market is. Once this company stops selling their hardware, you're looking for them to make up those revenues within their software business. And the good thing about software is that it is a lot higher margin, and it is a subscription. So hopefully, it'll be much stickier. So far, it has been. Their monthly churn is low at less than 1%. Their 12-month retention is about 94%. So, for a fitness class, it's actually pretty exceptional. I just think we're in a very hyped moment for Peloton specifically, and I wonder -- I mean, it's almost a $9 billion company. For reference, Planet Fitness, which is, obviously, the other side of fitness, that low-end, very low-cost gym, that's a $6.6 billion business.

Hill: I'm glad you mentioned Planet Fitness. While you were talking, I was thinking, isn't this also all happening in an environment where Planet Fitness is growing and expanding, specifically because Planet Fitness is taking -- I mean, yes, technically, they're in the same business as Peloton Fitness, but they're going about it in a very different way.

Malin: Way different consumers.

Hill: The whole $10 a month thing, the judgment-free zone, all that sort of thing. And they're growing nicely, and the stock is reflecting that.

Malin: Yeah. Planet Fitness really has something going for it in that they are not trying to compete with other gyms, they're trying to attract people who previously don't visit the gym. Sort of an untapped market in terms of gym advertising, I would say. It's an interesting business. And it is a very low price, but they have made that work. It's a scalable model for them. I think that's much more interesting to me, and I can see that working 10 years down the line being a much bigger business than Peloton.

Hill: I just want to highlight the fact for anyone listening that at no point in talking about Peloton has Abi mentioned the commercial. [laughs]

Malin: We're in peak hype. That commercial was so ... tone deaf is the only word that comes to mind. Honestly, kind of genius, too, because people who probably weren't aware of Peloton are now aware because they're offended by this ad. But everyone's talking about it. No news is bad news, I guess.

Hill: To go back to the case that you were laying out for Peloton, it had nothing to do with the ad. Although, you're right, the TV commercial and all of the attention that it got, and the backlash, and then, of course, we had the backlash to the backlash -- yes, it does add to the whole hype. But, at the end of the day, that commercial is gone, the calendar is going to flip to 2020, and the underlying business is still going to be the underlying business. And the way you're looking at it, and others, it's like, this is fine, I just don't think it's as big as you all seem to think it's going to be.

On the flip side -- if Peloton is getting too much attention, what is something that you look back on in 2019 and go, "Boy, this should have gotten more attention"?

Malin: If we look at 2019 as a whole, it's been actually a pretty interesting year for investments all around. The S&P 500 is up more than 25% year to date. Only a very small portion of that S&P is actually losing money for the year. Very few companies are doing poorly this year. Oil is up about 25% year to date. Gold is up about 12%. But I think the part that's really interesting to me is that corporate bonds are up almost 9%, and treasuries are also up almost 9%. Typically, treasuries are specifically pretty interesting, because they tend to decline when riskier assets increase in value. So, the fact that everything is moving in the same direction signals that there's maybe some coming hesitancy, maybe some disagreement about where the market is going, things like that.

I think the stock to watch for that trend would be Tradeweb. Tradeweb went public in April of this year, I believe. They just haven't really garnered as much attention as I would have expected them to. They are doing well, for sure. But I think, as we see this return of volatility and hesitancy in the market, and maybe even a correction in valuations ... it's known that there's a relationship between stocks and bonds, and when stocks become less attractive, people tend to shift money into bonds. Tradeweb operates an electronic trading platform for bonds. They operate in four asset classes, but they focus primarily within the rates, which includes U.S. Treasuries and money markets. And then they also have a credit and equities portion.

I think it's one that people don't talk about because it's hard to digest, given that it's the bond market, and typically, people in the equities markets aren't as interested in the bond market. But I think it's something to keep in mind.

Hill: It's hard to digest, it's also kind of boring. Like, for people who are interested in --

Malin: No, but it's so fascinating! It's so fascinating, because when you look at the story -- historically, the equities market has shifted almost entirely to electronic trading platforms. But the bond market has actually lagged entirely. Bonds are still traded as they were like you see in really old movies, when they call up and make a deal, and they're price sourcing. It's this chaotic process, for a lot of reasons, but, bonds are typically done in much larger packages, and the people trading them are very hesitant to give away their strategy with buying or selling. So, it hasn't moved into today's era. I think, as bonds come back into favor, this is a company that you'll see a lot more volume, a lot more revenue, and it gets a lot more interesting.

Hill: I think Tradeweb and bonds in general probably need better PR. Maybe they need to create their own controversial TV commercial just to get some buzz going.

Malin: [laughs] Maybe that's what we need.

Hill: What are you watching going into 2020?

Malin: Going into 2020, I am very interested to watch how big tech in general is treated in terms of regulation. We're seeing a lot more scrutiny. Obviously, we're coming up on an election, which obviously brings up some of these issues. But I think regulations are certainly on the top of everyone's mind. I think taxes on the top of everyone's mind. We've seen a lot of these big tech companies be treated very favorably for years, and I think there's maybe a reckoning coming for that.

Hill: I think you're absolutely right. It'll be interesting to watch. And, yeah, the fact that it's going to be a presidential election, it's hard to go wrong taking swings at big, successful tech companies. But I'm also curious to see, to the extent to which any of the big tech companies -- not so much Microsoft, but more Alphabet, Amazon, Facebook, Apple to a lesser extent -- to the extent that any of them decide to make pre-emptive moves -- earlier this year, I got the chance to talk with David Kirkpatrick, who wrote The Facebook Effect. He thought Amazon was going to just proactively spin out Amazon Web Services.

Malin: I've read that, actually, increasingly more within the past, like, three months. That's Wall Street's guess, maybe.

Hill: I think, if you're an Amazon shareholder -- and I am -- on some level, you're kind of rooting for that. It would simultaneously reduce the regulatory risk, and it would also be spinning out an incredibly large company. I mean, the potential, just from a stock perspective, of AWS as its own business, is pretty enormous.

Malin: Interesting you say that. I feel like, as a shareholder, I would rather it stay together, just because the business has so many synergies, and the way that Amazon works so well is, they get the cash flow from any of their multiple divisions and they can redeploy it wherever they're best going to see growth. AWS has been not only growth for them, but also a very cash flow positive business aspect for them. It sort of subsidized some of those other businesses that maybe don't operate quite as efficiently, i.e. the Amazon store. I mean, logistics are a really hard business. Amazon can compete there because they have the profitability across the company to support that. So, as a shareholder, I'd rather see them not broken up.

If I were management, I think it's a really tactical next move. And I think the sum of the parts here ... I mean, it's hard to imagine because, Amazon's such a large company, but I would imagine that the sum of the parts might be even bigger than the thing together.

Hill: So, if you go back a few years, and you look at eBay, when PayPal was in-house at eBay. That was the drumbeat for a few years. "They should really spin this out, unlock the value." And they did. And now PayPal's market cap is, I don't know, 4X the size of eBay's? Maybe even more than that? Do you foresee, if Amazon were to spin out AWS, something like that? Where AWS becomes dramatically more successful and bigger than the resulting Amazon? Or, do you just think, "No, it works better together, I'm not predicting that type of split"?

Malin: I don't know if it would be quite as drastic, but I do think at least in the short term, AWS is the more attractive asset.

Hill: Before we wrap up, just want to -- again, we're coming to the end of 2019 -- thank the dozens of listeners and ask for a little bit of help. It is the season of giving. If you could help us out with a review. Reviewing our show, whether it's on Apple Podcasts or Google Play or Stitcher, it actually is one of those things that helps other people find the show. So, if you could take a moment, particularly if you're enjoying the show. If you hate the show, just drop us an email at [email protected].

Malin: [laughs] Don't write a review.

Hill: As my longtime friend Erik Rydholm always says, if we're doing well, tell others; if you think what we're doing stinks, tell us, and we'll see what we can do to fix it.

Abi Malin, thanks for being here!

Malin: Thanks for having me!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That'll do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday.