In one sentence: Using Peloton's rise from about $20 to about $165 and back to about $20, Phil and Danielle ask whether the company has a durable moat, and whether a network effect built on social workouts is the real thing; they leave the answer open.
Key ideas
- The context. Phil opens by saying the intro theme is that Buffett-style investors can sit in cash for long periods yet still earn very high returns. Today's topic is Peloton, covered in episode 267 (about a year and a half earlier). [00:00–02:00]
- Product and experience. Danielle used only the app on her own bike and loved it; Phil uses the rowing equivalent (Hydrow), where live classes and a peer group keep him going. Much of the first quarter of the episode is personal anecdote about how motivating it is. [02:00–13:00]
- The stock story. IPO late 2019 near $20–22; about $40 pre-COVID, back to $40 by June 2020, about $140 by November 2020, a dip to about $100, and a peak near $165–170 in early 2021. By early 2022 it was back near $20. A Sex and the City plot point and an ad that was pulled added to its bad run. [13:00–17:00]
- A price drop is not a sale. Danielle admits that "I wish I'd bought at $20" is easy to say, especially when you love the product. [17:00–18:30]
- The first problem: it loses money. Phil says that a company that loses money, and lost more after the IPO, is only worth owning if it has a gigantic, durable moat and the losses are shrinking. This is "if", not an assumption. [19:30–22:00]
- What kind of moat? Phil first calls it a "gaming moat" like Activision's: at any hour you can find thousands of others to play with. Danielle calls it a network effect like Facebook. They agree the question is whether it really exists. [22:00–24:30]
- Two layers of network. Danielle: strangers in classes, and, far stickier, real-life friends who also own the equipment, so people recruit friends to buy. Phil, an introvert who rows alone with the recorded classes, says it doesn't affect him. Each of them is a sample of one. [24:30–28:00]
- Weak points they find. Few live classes versus many recorded ones; the full leaderboard needs Peloton hardware; a rival (Zwift) can win committed cyclists; patents on live classes with a leaderboard are uncertain. [24:30–28:30]
- Look quarter by quarter. Phil's method: compare each quarter's revenue with the same quarter a year earlier. Revenue in his figures grew about 3x in mid-2020, about 2x in the December and March quarters, about 50% in June 2021 and only about 5% year over year in September 2021, so growth was slowing fast though still positive. His numbers are from memory and not checked here. [28:30–32:30]
- To be continued. They stop and say they will return, with the stock down about 90% from its peak in a few months. [32:00–33:00]
How it maps to RuleOne
- This is Module m2 in practice: ask what the moat is, how durable it is, and what evidence would show it weakening.
- The quarter-vs-prior-year revenue check can be done on /stock/TICKER/ pages and in the 10-Q on EDGAR.
- Loss-making companies would normally fail the screen's profitability and ROIC filters; this episode explains why.
Buffett, Munger and Graham links
- Munger's four filters, with the second being a durable competitive advantage, as in 001.
- Buffett on network-type moats and "the durability of the franchise": Berkshire letters of the late 1990s discuss franchises versus businesses.
- Graham's warning about companies bought on a story and growth projection rather than on the numbers, The Intelligent Investor, ch. 7 and 11.
Words to know
- Network effect: a product becomes more valuable to each user as more people use it.
- Durable: lasts long enough to matter, typically a decade or more.
- Trailing twelve months (TTM): results for the latest four reported quarters.
Try this
Choose a consumer subscription company you use. Write two sentences on its moat and one on how a competitor could attack it. Then open its /stock/TICKER/ page and compare revenue growth in the last four quarters against the same quarters a year earlier.
Check yourself
- Why is it not enough that a stock is "down 85%"?
Answer
Price relative to the old price says nothing about what the business is worth; it can still be expensive. - Why is a money-losing company a harder case for Rule #1?
Answer
You must rely on a durable moat and a path to profit, since there are no owner earnings to value. - What two layers of network did Danielle describe?
Answer
Strangers you meet in classes, and friends in real life who own the same equipment and recruit each other.
Short quotes
"Is it a moat? Because their stock has gotten smashed." (Phil, ~28:00, auto-transcribed)