EFTA00807317.pdf

HONEYCOMB ASSET MANAGEMENT E. Potential Opportunity: BUY Peloton 0 PELOTON Price Target (YE20): $42 / +91% Risk Price (YE20): $14 / -34% Risk / Reward: 2.7x Current Price: $22 February 5, 2019 STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION I EFTA00807317  OVERVIEW HONEYCOMB I Peloton: It's the Tesla + Netflix of Fitness ASSET MANAGEMENT WHY BUY PELOTON? • Offering: With a leading hardware, software, and media-integrated offering, we believe Peloton can be a disruptor in the global fitness market • Growth: We forecast a >70% revenue CAGR through 2021, supported by the signature cycling product, new product roll-outs, and international expansion • Valuation: We see +91% upside to our year-end 2020 PT with a 41% IRR and 2.7x risk / reward, with high growth and a low-churn subscription component driving value creation STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION EFTA00807318 PELOTON OVERVIEW HONEYCOMB Disruptive hardware, software, and media-integrated fitness offering ASSET MANAGEMENT • Fitness-focused business, currently centered around their signature cycling product, pictured below • Offering combines a high-quality studio bike, software including health metrics and social engagement, and media with motivational instructor programming • Peloton is easy to order online (as well as at Peloton boutiques), with white glove delivery and setup for a similar ordering experience to Casper mattresses • With a differentiated offering mixing the convenience of a home gym with the quality of a boutique fitness class we believe Peloton can disrupt the traditional fitness model Any 'r' ' and intemcbmi Immershre performance and health metrics Source: Company data STRICTLY CONFIDENTIAL NOT FOR DISTP,BUTION 2 EFTA00807319 PELOTON POSITIVES - COMPETITIVE PRICING HONEYCOMB Competitive pricing versus other premium fitness offerings ASSET MANAGEMENT • Peloton makes money through selling its bike along with class subscriptions This is different from most premium gyms that have less upfront cost but either high monthly subscription fees or a pay-per-class offering - Unlike gym memberships, the cost of Peloton can be spread across multiple users in a household • As shown in the following chart, the two-year average monthly cost per rider for Peloton is below competitive premium fitness offerings =I= PELOTON' AVG. MONTHLY COST PER RIDER OVER TWO YEARS $143 AVG. MONTHLY COST PER COUPLE OVER TWO YEARS $143 SOULCYCLE 2 $408 $816 $336 $672 ODFLYWHEE0 $290 $680 EQUINOX" 5250 S500 HeMine $185 $370 CLASSPASS 2 $180 $360 ):(rangetheorif 5 $169 $338 Source: Peloton calculation and company websites STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION EFTA00807320 PELOTON POSITIVES - LOW CHURN HONEYCOMB We believe the Peloton model supports structurally low churn ASSET MANAGEMENT • Customer retention is 96% after 12 months and 84% after 24 months, for monthly churn of <1%. - We believe this is a testament to the quality of the product and the strength of the business model - Having a Peloton at home is more convenient than going to the gym, and we think users are less likely to cancel a subscription to a device they own in their home when compared to a traditional gym membership • One Peloton subscription includes multiple user profiles (similar to Spotify or Netflix), which serves as a family plan that we believe further lowers churn • The low churn factor is key for Peloton's attractive subscrintion economics Total Workouts Workouts per Subscription 2.500.000 15 Id 2.000.000 13 1.500.000 12 1.000.000 10 500.000 0 8 22222ir? 444 $ 2 22222 488 4 ; 5 RARRRRRRARRRR fl fl RegeRe Source: Company data STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION_ 4 EFTA00807321 GROWTH DRIVERS - SIGNATURE PRODUCT HONEYCOMB Growth in the Peloton model begins with core cycling ASSET MANAGEMENT • Core cycling is demonstrating continued momentum. Peloton sold -22k bikes in 2015, -62k in 2016, and -131k in 2017 • Bike Subscribers grew over 700% during this period as shown in the chart below, with Q/Q subscriber growth averaging 30% over the past 8 quarters • Through investments in the brand, sales force, and retail footprint, we believe Peloton has a continued runway to drive bike product and subscription revenue growth within the US Bike Subscribers 400,000 350,000 300,000 250,000 4O15-4O17 200,000 Bike Subs up >700% 150,000 100,000 50,000 l I - • I l I I 4,\ oe N 0'. 41. e" l.o ) IN6\ N6\ &AV- )osAir IT`6\ V" 6\# a eV ci 6\ t:' Source: Company data STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION S EFTA00807322 GROWTH DRIVERS - INNOVATION PIPELINE HONEYCOMB New product innovation is beginning with the Peloton Tread ASSET MANAGEMENT • Peloton has a product innovation pipeline, beginning with a treadmill launch in 2019 - We see significant potential in treadmills as 5mn+ treadmills are sold annually in the US, 3x more than stationary bikes. - Peloton plans to roll out lower price point Bike and Tread versions in coming years which we believe can further increase the TAM - A potential 3rd product launch is planned for 2021 • One subscription covers all of Peloton's products, which encourages cross-sell for Bike and Tread customers • In addition to hardware, Peloton offers a monthly app-based subscription product, which further expands the TAM - Peloton sees 47.8 million households open to subscription fitness; with its talented instructors and loyal customer followings, we believe Peloton can be a leader in app-based fitness subscriptions PRODUCT ROADMAP BIKE VI $1,995 gig TREAD VI $3,995 BIKE V2$1,495 TREAD V2 $1,995 I PRODUCT 3 $995 2019 2020 2021 Source: Company data STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION 6 EFTA00807323 MODEL OVERVIEW HONEYCOMB Mix shifting toward subscription revenue is positive ASSET MANAGEMENT • With the Peloton model, the Subscription business becomes a larger part of the revenue and GP mix over time, which is positive for long-term earnings visibility - Between 2O18 and 2O21 we forecast a 70%+ revenue CAGR with product revenue growing -65% and subscription growing -8O%, reaching 2O% of revenue in 2O21 - With subscription gross margins of -75% versus product GM of -35%, we forecast subscriptions representing 35% of gross profit in 2O21, up from 28% in 2O18 - As gross profit grows, Peloton can leverage expenses; we forecast operating expenses going from -6O% of revenue in 2O18 to -40% in 2O21, with EBITDA and FCF turning positive in 2O21 and net income turning positive in 2022. • Additional drivers such as advertising and sponsored classes are not included in our estimates and could be a source of upside Revenue by Segment ($mn) Gross Profit by Segment ($mn) $2.000 $1000 2O17-2O2OE 2017-2020E $800 $1.500 Revenue CAGR >70% GP CAGR >6O% $600 $1.000 $400 $500 $200 $- 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E Product Revenue • SubSCrIptiOn Revenue Product Gross Profit ■ Subscription Gross Profit Source: Company data Honeycomb estimates STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION 7 EFTA00807324 VALUATION HONEYCOMB ASSET MANAGEMENT • We see +91% Price Target upside with a 41% IRR and 2.7x risk / reward, with high growth and a low-churn subscription component driving value creation Price Target: $42 (+91%) on 8.5x Honey 2021 subscription revenue and 5.5x Honey 2021 product gross profit. Risk Price: $14 (-34%) on 4.5x a -25% discount to Honey 2021 sub revenue and 1.5x a -25% discount to Honey 2021 product GP Risk/Reward: 2.7x PRICE TARGET at Year-end 2020 RISK PRICE at Year-end 2020 Subscription Subscription Haircut 2021 Subscription Revenue 686 2021 Subscription Revenue -25% 515 EV / Revenue 8.5x EV / Revenue 4.5x EV Contribution 5,831 EV Contribution 2,315 Product / Other Product / Other 2021 Product / Other GP 988 2021 Product Other GP -25% 741 EV / Gross Profit EV / Gross Profit 1-5x EV Contribution 5,432 EV Contribution 1,111 li laI Iolal Enterprise Value 11,264 Enterprise Value 3,427 Net Debt (685) Net Debt (685) MCAP 11,948 MCAP 4,111 Shares O S 284 Shares O/S 284 Share Price $42 Share Price $14 % return 91.3% % return (34.2)% Implied EV/2021 Revenue 3.2x Implied EV/2021 Revenue (-25% haircut) 1.3x Implied EV/2021 GP 7.5x Implied EV/2021 GP (-25% haircut) 3.0x IRR 41% Risk/ Reward 2.7x Source: Honeycomb estimates STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION 8 EFTA00807325 CONCLUSION ,6 HONEYCOMB ASSET MANAGEMENT BUY Peloton Price Target (YE20): $42 / +91% Risk Price (YE20): $14 / -34% Risk / Reward: 2.7x Current Price: $22 STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION 9 EFTA00807326 APPENDIX - PRICING OPTIONS HONEYCOMB Hardware packages (incl. financing options), plus membership subscriptions ASSET MANAGEMENT Choose your Bike experience Get what you need to start training. whether its just the Peloton Bike, warranty and Membership. which gets you unlimited access to Petotcn classes, or aCOeSSOrres to equip yOu and yOur faMily PELOTON MEMBERSHIP Access all classes via the Pelotpn Bike. Tread and app S39irno Requires Peloton Bike or Tread BASICS PACKAGE ESSENTIALS PACKAGE WORKS PACKAGE FAMILY PACKAGE SHOP BIKE SHOP TREAD $2245 $2,404 $2,494 $2,694 Or pay as low as $58/mo Or pay as low as $62/mo Or pay as low as 564/mo Or pay as of. al • Unlimited Peloton classes on the Bike. Tread and fm 39 MOS at ' foe' 39 mos at cr, APR for 39 moS at M, AD; Ter 3'4 : on the go • 20. lire classes daily and over 10.000 on.demand SHOP NOW SHOP NOW SHOP NOW 1 SHOP NOW • unlimited user profiles • A variety of class types including cycling. Includes Includn Includes Includes running, bootcamp, yoga. outdoor and more Pelolo^ Si< Peloton Luke Peloton eke Peloton Sae J includes Digital Membership (access on OS, e.arrart, 1 Yr. Limited warranty 1 Yr. Limited warranty 1 Yr. Landed Warranty Android and Web) De N.') an: Situp .ES: I 0 (*Every and Setup (Est) 0 Delivery and Setup (Est) 0 Detnery and Setup 'Est • InstruCtOr Curdled training programs gives (1 Pair) Shoes (1 Pair) Shoes (2 Pa weihrs (I Dew) Mints (I Pain weights I F., • Live workout metrics including distance, heart rate. and resistance Keadphones(1 Pair) Headphones II PIRO Headphones j2 = ) •- Heart Rate Waiter Heart Rate men ito• .2 • Derailed workout performance dashboard She Met Ste Mat • Live and 0nDeMand class Leaderboard Water Bottles (2) Source: Company website as of 2/5/2O19 STRICTLY CONFIDENTIAL NOT FOR DISTRIBUTION EFTA00807327