The interactive home fitness pioneer
Peloton's business was on fire even before COVID-19 reared its ugly head in the U.S. in March. The business has doubled its Connected Fitness subscribers -- those who own the bike or Tread and subscribe to the interactive content -- during each of the company's last two fiscal years and is on pace to do so again this year.
Considering the widespread closure of gyms and other fitness facilities as a result of COVID-19, and the general desire to stay at home, demand for Peloton bikes has overwhelmed supply, leaving the company scrambling to increase manufacturing capacity. Bike production quickly doubled by June compared to the early March pre-COVID pace, yet order-to-delivery times are still several weeks longer than usual.
Management expects to meaningfully catch up with demand by late July or early August. It is also investing heavily in a new state-of-the-art manufacturing facility in Taiwan with Tonic, the former manufacturing partner that the company acquired last year. That facility should be ready to fulfill holiday demand later this year.
Peloton is the leader in the interactive fitness category, having invented the category from scratch before launching in 2012. At the time, it seemed both futuristic and possibly a fad, but Peloton has proved the doubters wrong. The service has extremely compelling fitness studio content, engaging instructor personalities, and a wide range of fitness class types well beyond just indoor cycling. Non-cycling classes include yoga, meditation, walking, running, bootcamp, strength, and stretching.
In fact, Peloton's member base is known to be fanatical. Average monthly net subscriber churn, or subscriber cancellations, is well below 1%. According to the company's surveys, the Peloton bike has a Net Promoter Score ("NPS") that ranges from 80 to 93, and the newer treadmill (the "Tread") has a NPS score "approaching 80." For context, a NPS score above 0 means the product or service has more promoters than detractors, which is good. A NPS score above 50 is considered excellent and a score above 70 is considered world-class.
Peloton shareholders know the company has a bright long-term future given the potential market size and the strong profit margins it should have at scale. But just as comforting is the fact that demand for the company's products should only accelerate to the extent that the pandemic worsens.
The audio streaming leader
Demand for Spotify doesn't appear to have accelerated meaningfully due to the pandemic, but its strong growth trajectory has continued uninterrupted. The company's first-quarter report showed that total monthly active users ("MAUs") and Premium subscribers both grew 31% year over year, which is similar to its recent pace.
Mostly, COVID-19 appears to be changing listening habits -- the amount of listening to more mellow, relaxing music has increased, for example -- but not decreasing overall engagement. The one exception to that may be podcasting, which may be seeing lower engagement since many listen to podcasts during their commutes, which have decreased significantly.
This decrease in podcast engagement should be short-lived, though. In May, Spotify announced it had signed Joe Rogan and the extremely popular Joe Rogan Experience podcast to a multiyear exclusive deal. That's going to drive many more listeners to Spotify, some of whom will become Premium subscribers and regular listeners to ads on the company's growing library of owned podcast content.
Spotify has long suffered from modest margins in the music streaming business due to the high royalty payments it pays the music labels and other rights holders. That's why the company's aggressive push into podcasting is so important. For the first time, Spotify should be able to create original content -- a fixed cost -- that can be increasingly monetized across a rapidly growing listener base. That's a solid recipe for margin expansion.
The subscription video-on-demand king
Netflix added a whopping 15.8 million global streaming paid net additions in the first quarter, blowing away management's guidance for 7 million. That came as a result of COVID-19, which significantly increased time spent at home among people all over the world. With more time spent at home, more new customers signed up for Netflix and more existing customers found reasons to maintain their subscriptions.
Netflix is not only fortunate to have a compelling service, but it's also priced very modestly relative to the value it provides. In the past, management has said the average Netflix subscriber watches about two hours of Netflix per day. Given the average revenue per user of about $11, that works out to about $0.18 per hour of entertainment. Considering the cost per hour of going out to the movies, dinner at a restaurant, or other forms of entertainment, Netflix is an incredible value.
Not only is Netflix benefiting from people spending more time at home, it's also especially insulated from the recession due to its high value proposition. For example, households are far more likely to cancel their expensive cable television subscriptions, which now don't even include live sports anymore, than they are to cancel Netflix, which costs just $12.99 for the Standard plan in the U.S.
Furthermore, Netflix has a long pipeline of new content coming onto the service for the remainder of this year and well into next year. That's because Netflix releases full seasons of its content all at once, which means it finishes filming for a given series well in advance of its release date. Other studios that release one episode at a time don't have the same pipeline of content. That should only make Netflix look even better relative to video entertainment alternatives.
Investors should take comfort investing in Peloton, Spotify, and Netflix, considering they all have extraordinarily bright long-term prospects and are also thriving amid coronavirus.