In a recent November article in Forbes, Peloton CEO John Foley said he isn’t quite sure what to make of his companies public market’s reception commenting: “It’s a head-scratcher.” As I will explain, the failings of WeWork, the massive declines in value among Uber and Lyft, and most recently Under Armour and Fitbit's valuation woes, leads one to question John's confusion.
First let me congratulate the team at Peloton and John for what they have accomplished to date as a business. It is hard to do and Peloton has a legion of happy customers. Our fitness + technology podcast revealed some interesting stories about the Peloton brand a few years back during an interview with Peloton co-founder Tom Cortese. You can listen here. The bottom line is this, however, Peloton is not nearly worth $8 - $10 billion dollars.
As I shared in my keynotes in Europe and North America in the past few months prior to the Peloton IPO, what we are seeing with unicorns in the markets is a cautionary tale the adverse consequences of which will ultimately be realized. Hopefully investors will not judge the real long-term prospects for digital health and fitness solutions as a result of a relatively temporary anomaly in the markets due to the over valuation of these companies.
That there is a problem of over valuation is backed by academic research. Squaring Venture Capital Valuations With Reality, a research paper by professors at the Sauder School of Business at the University of British Columbia and the Stanford Graduate School of Business, documents why Peloton, among others in the digital fitness space, are over valued. Not surprisingly the research received only a perfunctory round of coverage from some important investment and tech publications when it was published because it exposes the ponzi scheme going on that many do not want retail investors to realize. The WeWork debacle was an awakening and it won't stop there.
You see the pervasive overvaluation of unicorns like Peloton results from the widespread use by analysts, the press, the media, and often the companies themselves of “post-money valuation.” They take the price per share realized in the latest funding round and use it to revalue the older classes using the higher price of the latest class of shares, even though each new round of funding effectively sucks value out of the previous ones via its superior rights. They then float a small number of shares to the public markets at even higher valuations to unsuspecting retail investors. As the research paper stated:
“Overvaluation arises because the reported valuations assume all of a company’s shares have the same price as the most recently issued shares.”
Peloton priced its IPO at $29 per share. This valued Peloton at over $8 billion, almost double its most recent valuation in the private market of $4.15 billion, according to data provider PitchBook. Let's look at the assumptions behind Peloton below in this infographic below:
The valuation which Peloton came to market with made certain assumptions, like 60% of all home gym equipment will be from Peloton. You can read more of the laughable assumptions in the Peloton public filings here. Hmmmm. As with other technology fitness brands, think Fitbit and Under Armour as I will explain below, a lot of hype and over valuations have resulted in some unimpressive results.
Hubris in the capital markets, as it relates to digital fitness, has been demonstrated for a few years now. It started with the acquisition of fitness applications by Under Armour. Plank and his team made a big bet on the fitness data technology space with the acquisitions of MapMyFitness, EndoMondo, and MyFitnessPal for over $700 million, becoming the largest digital health and fitness community in the world.
Under Armour, believed data-driven technology would lead the company to generate up to $7.5 billion of revenue by fiscal year end 2018. Guess what, it did not work and Plank stepped down as CEO just last week. The investments in overvalued digital apps was a big part of his failing when you look at the share price which has declined by more than half since the digital acquisitions. They simply paid too much for these technology platforms.
If this example is not enough consider this: Fitbit went public in 2015 at a value of $4.1 Billion and it had a $130 million annual profit at the time. Google just purchased Fitbit for only $2.1 billion over 4 years later. The business was an investment bust when it came to what it was thought to be worth and what ultimately resulted.
What is happening in the capital markets has been bad for so many companies across technology businesses. Despite the industry appearing relatively healthy, an unprecedented trend of fewer funded companies, but larger round sizes has emerged. 2019 seems to be bringing an end to the run in the box set of VC’s annals, the period between Facebook’s 2012 IPO and Uber’s 2019 debut is instructive to look back at. You see Fake ‘Unicorns’ like Peloton, are running roughshod over the venture capital industry and increasingly in the public markets. In the end they will do damage to real businesses with real and sustainable business models.
As venerable Professor Scott Galloway and his Section4 Youtube rant SoftBank's Recipe for Unicorn Feces | No Mercy / No Malice attests it's not just WeWork; Compass, Opendoor, and Oyo all count on venture capital firms like Softbank as significant backers. Scott unpacks each companies business model, funding, differentiation, and yogababble with an eye toward red flags. You can watch here. According to the professor:
"The 2020 story will be a 50%+ decline in the value of privately traded unicorns."
Galloway's group Section4 looked at the S-1 language of a group of tech firms and made a qualitative assessment of the level of "Yogababble", aka, the level of bullsh*t they espouse in the attempt to find a viable business model. His analysis yielded a correlation between a firm's level of Yogababble and its post-IPO stock returns. It's not just the likes of WeWork that struggled with improbable missions. In the current age the level of double speak and BS related to company valuations and their purported "missions" is unmatched and done on purpose to disguise the truth from fiction. Watch his analysis in the video below where he specifically mentions Peloton's mission as being a 9 on a scale of 1-10 when it comes to BS at 2:18 in the video, saying:
Peloton, on the most basic level, Peloton sells happiness. No. Similar to Chuck Norris, Christy Brinkley, and Tony Little, Peloton you sell exercise equipment . The bullshit rating here 9.
Scott is right. When Peloton, having just over 500K subscription users at the point of its IPO, has a value of nearly two times Planet Fitness with its 14 Million users, and over 20 times Nautilus that John is scratching his head appears at least disingenuous. In the end I fear the cautionary tale of Peloton and others will leave damage in their wake but also some opportunities for value creation for the patient investor in the carnage to come.