On Dec. 21, Peloton (PTON 6.33%) announced that it's acquiring Precor, one of the largest global fitness manufacturers, for $420 million in cash. While it looks like a small acquisition in relation to Peloton's $40 billion market cap, it should significantly expand Peloton's total addressable market for two key reasons.
Reach and distribution
Any direct-to-consumer business is probably familiar with the difficulties around logistics and delivery. Since Peloton outsources very few components of its manufacturing and delivery process, it's no exception. In fact, thanks to the COVID-19-induced demand Peloton is seeing, it's having a hard time delivering bikes or treadmills in a timely manner. In each of Peloton's three previous conference calls, management has mentioned customers' elongated wait times. While backlogs are often a strong sign of demand, most Peloton customers would prefer quicker delivery.
Currently, the shipping delays are due to limited manufacturing and delivery capabilities. Peloton has made prior efforts to increase production capacity by purchasing a Taiwanese manufacturing facility called Tonic Fitness in 2019, but up until now, most manufacturing has been done in Asia, meaning Peloton bikes end up taking a while to ship to U.S. customers. That's where Precor comes in.
Precor has a combined 625,000 square feet of manufacturing space located on both the East and West Coasts. By integrating these facilities into Peloton's existing manufacturing network, Peloton should be able to build and ship products to U.S.-based customers more quickly.
In addition to greater manufacturing capabilities, Precor has good sales relationships with tons of commercial spaces. For public gyms, hotels, offices, and more, Peloton's sales process just got much easier. The deal also means that Peloton subscribers' memberships are no longer tied to their homes. They'll soon be able to sign into their account and enjoy their workout of choice on Peloton equipment in gyms, hotels, colleges, and more.
Expanding product suite
Precor also owns hundreds of patents focused on bikes, ellipticals, climbers, and various strength-based products. While not all of these patents will be highly useful, Peloton can expand its research and development budget and find ways to implement some of them into new initiatives. Precor employees have been designing fitness equipment for more than a decade now, and that experience will be helpful in expanding into other equipment offerings.
Over the last 12 months, Peloton spent $108 million on research and development (R&D), representing roughly 5% of revenue. For a consumer technology business that operates in a developing industry, pouring more money into research and development -- and doing so effectively -- can be a major competitive advantage. This Precor acquisition will add 100 new employees to the R&D team, and it also grants Peloton the rights to expand into new products through Precor's suite of patents.
For example, Precor owns more than 20 patents for elliptical machines. If Peloton were to expand into an elliptical-type offering, it might attract older users looking for a lower-intensity workout. Most current Peloton users would probably have very little interest in an elliptical machine, but even if every new product isn't a hit with existing users, all the offerings collectively make the Peloton membership more compelling.
Peloton CEO John Foley has stated that Peloton's big audacious goal is to eventually reach 100 million users. With more than $2 billion in cash and marketable securities on Peloton's balance sheet as of its most recent quarter, this $420 million acquisition seems like an inexpensive way to make that goal much more achievable.