In one sentence: Phil walks through a quick "buy the whole business" valuation of Peloton: market cap, cash, debt and cash burn, concludes that at about $26 it is interesting but not on sale, and stresses that this is a teaching exercise.
Key ideas
- A smaller price proves nothing. If it fell from X to a fraction of X, that doesn't make it cheap, like "90% off" at a Miami gold store: 90% off of what? [02:30–03:30]
- Think like an owner of the whole company. At about $26 a share, market cap was about $8.8 billion, versus about $55 billion at the peak (the "about seven times" in the episode). Phil's figures as recorded. [03:00–05:00]
- Adjust for cash and debt. Cash and short-term securities were about $1.6 billion and long-term debt about $800 million (leases excluded), so net cash was about $0.8 billion and the effective price about $8 billion. Phil also checks that current assets (about $2.8 billion) exceed current liabilities (about $1.2 billion). [05:00–08:30]
- The simple target. Assuming the business will be bigger in ten years, Phil wants owner earnings of about 10% of the price, so about $800 million a year on $8 billion. This is the payback-time idea. [09:00–10:00]
- Operating cash flow is the first test. The last four quarters were about −$1.1 billion, with another roughly $300 million in capital spending. Phil rounds the burn to about $1.2 billion a year against $1.6 billion in cash, which is about a year to a year and a quarter of runway. Phil's figures, not checked here. [09:30–12:00]
- A rough read of management. Phil sees poor capital allocation (such as a $50 million studio) and big negative working-capital changes (inventory), which suggest they planned for pandemic growth to last. But he also notes that halting production and taking the stock hit shows a willingness to do the right thing. [12:00–15:30]
- Dilution and debt risk. At a depressed price, raising cash dilutes shareholders and new debt would likely be short-term and secured. The best path is to shrink back to positive cash flow, which they had before. [15:00–16:30]
- Mapping to the 4 Ms. Meaning (understand the business) and management are probably OK in the hosts' view; the real questions are moat and margin of safety. Get the moat right and an overpayment can still work out; get the price right with the moat uncertain and you need more cushion. [16:30–20:00]
- Not yet on sale. Cash flow peaked at about $800 million in 2020 when the market cap was about $56 billion, and today's cash flow is negative. Even at $26, Phil says it isn't there. He notes that a growth company's cash flow is depressed by growth spending, so you can adjust, but that is more advanced. [19:30–22:00]
- Founder-led and takeover angle. Like Activision (352), Peloton is a founder's company that has stumbled, so a buyer such as Apple might be interested. Acquirers can pay prices that look strange to outsiders because they see synergies. [21:30–24:00]
- Disclaimer in the hosts' own words. They say they are not experts on the company and are "blowing smoke" until they have enough information; the point is to show the method. [16:30–17:30]
How it maps to RuleOne
- Market cap, net cash, operating cash flow and payback time are all visible on /stock/TICKER/; this episode is a manual version of that screen.
- Cash runway (cash divided by annual burn) is a fast filter the screen's balance-sheet checks approximate.
- The quarter-by-quarter growth check from 355 pairs with this valuation pass.
Buffett, Munger and Graham links
- Graham's net current asset thinking and attention to balance-sheet strength, The Intelligent Investor, ch. 14–15 and Security Analysis.
- Buffett's "owner earnings", defined in the 1986 Berkshire letter's appendix on purchase accounting.
- Munger's filter order again: understand, moat, management, price (001).
Words to know
- Net cash: cash minus debt; subtract it from market cap to get the effective price of the operating business.
- Cash runway: how long cash lasts at the current burn rate.
- Owner earnings: cash a business could pay out to owners after the spending needed to maintain it.
Try this
On a company on your list from /stocks/, compute: market cap, minus cash, plus debt, then the target owner earnings at 10% of that number. Compare with its operating cash flow on /stock/TICKER/. If the cash flow is negative, compute the runway.
Check yourself
- How did Phil adjust the $8.8 billion market cap?
Answer
He subtracted net cash (about $1.6B cash less about $0.8B debt), leaving an effective price near $8 billion. - Why did negative operating cash flow worry him?
Answer
At the burn rate, cash would last only a little over a year, raising doubts about the company's survival and the risk of dilution or debt. - Which two of the 4 Ms were the hard ones here?
Answer
The moat (how durable the network effect is) and margin of safety (price versus owner earnings).
Short quotes
"At $160 a share, what in the world was somebody pricing this company at?" (Phil, ~03:00, auto-transcribed)