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No. of Recommendations: 17
Hi Bear,

Like you, I would generally prefer a true SaaS business over a non-SaaS business (or a business only partially based on recurring revenue like PTON). I do understand that a SaaS model naturally should lead to higher valuations than non-SaaS companies, all else being equal. But that’s where we differ. I don’t think all things are equal here. Consider again their 1Q report:

Connected fitness subs grew 137% (with 0.65% churn and a 92% retention rate) while digital subs grew 382%. They saw 20.7 workouts per connected user, showing a never-before-seen level of engagement on their platform. Revenue grew 232%. I haven’t heard a single person who doesn’t love the experience the company delivers. They have so much demand that they’re starting up new manufacturing facilities and accelerating delivery times. They are bringing new, highly anticipated equipment to market. They make money on competitor’s equipment with a lower cost digital subscription. They guided above the market’s expectations, despite being supply constrained. And all of this seems to have no end in sight with WFH continuing on.

I don’t consider valuations when I invest. And I don’t know what the future holds. But I’m pretty sure that PTON’s growth is not fizzling in the next quarter or two. And if that turns out to be true, I’m also pretty sure the company will continue to add to its gains. On the other hand, if growth starts to slow, it will get crushed. But that's no different than some of our other companies. CRWD’s technology may be disrupted. ZM may slow down by normal life snapping back faster than we all think. If those scenarios happen, the elevated valuations of our stocks will cause them to take a major hit too, regardless of DBNRR. I just don’t see a difference here with a story like PTON.

Is there greater risk with PTON? Maybe. Does their valuation imply greater volatility considering their non-SaaS growth story? I don’t know. What I do know is that their story is simply too good for me to pass up for now (my allocation is 14%). But I'm also watching carefully. If things change, I’m out.

-Dave.
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