The Problem With Ponzis…
Over the past few years, I’ve been highly critical of the Ponzi Sector. This is a whole grouping of companies that has no ability or desire to ever become profitable. Instead, these businesses have focused on rapid revenue growth because the stock market has rewarded them for this growth—especially if there are no profits. In reality, stock promotion is the core business of the Ponzi Sector—it allows the companies to raise capital and fund unprofitable growth, while insiders dump stock at insane valuations. Now, as the Ponzi Sector equities go into free-fall, a problem has emerged.
Let’s look at Peloton [PTON], the overpriced clothes rack with a built-in iPad. We just witnessed the best possible 6-quarter environment that the company will ever experience. The whole world was locked down, gyms were closed, and work was cancelled. People literally sat at home, bored out of their wits, armed with massive government stimulus checks, fixated on buying products. Despite every possible tailwind, Peloton lost $189 million in the year ended June 2021. As the stimmies wore off, losses exploded to $376 million in the most recent quarter. If this business cannot make money in this perfect environment, what is the operating environment where it earns money?
Investors will say that the goal at Peloton is to lose money on the hardware and make it back on the subscription product. Sure, I can see how investors may fixate on the growing subscription business, but this is a fad fitness business, churn will be high and accelerating now that gyms have re-opened. The expected monthly annuity will underperform, and marketing will always be necessary to bring in more customers.
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