The coronavirus has accelerated revenue growth of many stay-at-home stocks including Peloton (PTON 3.87%) But investors are wondering what happens when the pandemic comes to an end. Can the long-term growth continue? Motley Fool analyst Tim Beyers and Fool contributor Brian Withers discuss the key metric for investors to watch on a Fool Live episode recorded on Feb. 8.
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Tim Beyers: Agreed, Always Learning Fool. "Tim, how to think about Peloton's product growth versus subscription growth longer-term after the pandemic is over?" How do I think about it? I think Connected Fitness subscriptions is still the key metric here, I don't think the pandemic changes that, Always Learning Fool. We want that; that is the driver of this business. Can Peloton put people on bikes, on treadmills, on other equipment, and keep them engaged with that equipment? If they do, the business will continue to grow and it'll continue to grow at a healthy clip. That's the driver of the business.
Here's the thing that Peloton does not talk about, but I've seen this multiple times, and maybe you have, too. There's at least one Fool I know, Brian, who has bought a used Peloton bike, signed up the subscription, didn't buy the bike straight up off of Peloton, bought it as a used bike, but then got his Peloton subscription and is now paying the subscription and riding the bike. He's got a Peloton bike, but he didn't pay. Now, Peloton counts that as a connected, I mean I think, I don't see why they wouldn't.
Brian Withers: Yeah, they should. He's going to pay the 40 bucks unless he just paid the $12.99 and then he doesn't get all the features.
Beyers: Right. He didn't have to pay for the freight on the bike, but he is paying a Connected Fitness subscription. He is a Connected Fitness subscriber. So the useful life of a Peloton bike is longer than the subscription duration of the original owner.
That's a little bit mind-blowing, but it's true. That's why that churn rate can be low. That bike could change hands, say, three times, but still earn a Connected Fitness subscription. That's awesome if you are a Peloton because you've built the bike one-time and now you're still getting long-term returns on your investment in building and delivering that product.
Now, it's not always going to be the case. But just think about that for a second here. Connected Fitness subscriptions really is going to be the thing that you think about. That's what you want to see. If there is a dramatic drop-off in Connected Fitness subscriptions post-pandemic, OK, I will be concerned. I will expect some slowing growth rates on Connected Fitness subscriptions at some point, law of large numbers with or without the pandemic. But that's the metric I'm going to keep watching here.
Withers: Let me play out another scenario here.
Withers: Some people are afraid that this thing is going to become a place to hang your wet towels and stuff after a few months. But the cool thing is Peloton has your information and they can go, "Hey, you haven't worked out in a couple of months, what's up?" and they could have, "I just don't want it anymore. I injured myself." They can have a couple of things where all you'd have to do is click.
They could also if the person then canceled their subscription. I'm sure they go, "We, well, would like another year at 30% off," or whatever. Or at that point, they have to get the Precor thing up and going, but they could be in the refurb business. They could totally buy that bike back, now they have a domestic shop that they could bring the thing back and then sell, and this is probably a few years down the road. But rather than having stuff on Craigslist moving around, they then could get into it and then you could buy a refurb bike for 80% or 70% of a new thing, because the last thing they want is this thing collecting dust.
Withers: I think there's plenty of opportunity for them because they are a direct-to-consumer company. They have all this data, and they'll be able to take advantage of that over time.