Why Garmin Should Buy Peloton

Happy Monday!

It’s a day off for the markets, and it’s the calm before earnings season really gets started next week.

Today, I want to go over one of my not-so-wild ideas. I think Garmin $GRMN ( ▼ 0.38% ), an Asymmetric Portfolio stock, should acquire former Asymmetric Portfolio stock Peloton $PTON ( ▼ 5.52% ).

Before you scoff, did you know Garmin sells an indoor bike, bike accessories like bike computers and power meter pedals, and a streaming subscription with biking videos?

At the very least, Peloton is more compelling than that thing!!

More on that in a moment.

The market was in a bit of a downtrend last week, but it is still up a little over 1% so far this year. Earnings season and political turmoil should shake things up, for better or worse, over the next couple of weeks.

The Asymmetric Portfolio continues to struggle, underperforming over the past few months, although I’m looking forward to earnings season putting the focus back on operations rather than speculation.

One of the key reasons I think Garmin has asymmetric potential long-term is that it’s a key piece of hardware in tracking health and fitness, with the potential to add incremental recurring revenue streams from connectivity and health & fitness analysis and content.

It’s a classic marriage of hardware and software.

I think it’s time the company expands more aggressively into the fitness content side by buying a subscription-based business with 2.7 million paying premium members.

Longtime subscribers will remember that Peloton was once in the Asymmetric Portfolio on the thesis that it could “win” the fitness market and be a go-to subscription service for tens of millions of people worldwide.

What I realized was that the market simply wasn’t that big. Peloton could win, but it probably wasn’t going to be a big enough business for asymmetric upside.

Since then, Peloton has lost subscribers consistently (see above) but has also gotten its financial house in order by cutting operating costs, charging more for bikes (bringing hardware to a positive gross margin), and expanding the value of a subscription (also raising prices). The result is declining revenue as the market gets smaller, but a big improvement in free cash flow as margins kick up.

What Peloton doesn’t have is enough scale to go further. I don’t think there’s a “next big thing” beyond bikes, treadmills, and rowing equipment. Classes can get better, and the content keeps moving into new modalities, but the company needs scale.

Garmin has scale and could bring “tens of millions” of users (Garmin doesn’t disclose exact user numbers), the value of at-home fitness for a relatively low cost by bundling Garmin’s other data and connectivity services.

Garmin is trying to grow its recurring revenue with subscriptions, but right now, the offerings are disjointed and unappealing. To put my skepticism into perspective, there are 17 total plans available right now.

But the bones of a good subscription are there. Connect+ is $6.99/month and includes more value from the data you collect, like personalized nutrition tracking and recommendations.

You can see how trails and coaching would be valuable for an athlete.

There’s value in Connect+, but the fact that Garmin charges for it seems like a cash grab to me.

A connectivity plan for satellite connectivity is another $7.99/mo (the kids version is $9.99/mo). Again, there’s value, but give me a little more for the price.

What Garmin needs is more compelling value for its subscription offerings. And I think Peloton can bring that.

Today, Peloton’s subscriptions are $28.99/mo for App+ and $49.99/mo for a full subscription if you have Peloton hardware. I think you bundle the content in the $49.99/mo option with Garmin Connect+, Maps+, Tacx (which is now redundant), and Golf to make a compelling health and content option. And with the wider audience this product appeals to, you can charge less!!!

Who spends $800 on a watch and doesn’t sign up for at least one of these plans?

And once you have a Fenix 8 with a $34.99/mo plan your spouse might as well get one too…and your kids.

See how bundling within subscriptions is valuable?!

And as an added bonus, there are synergies between Garmin’s existing bike hardware and content that could reduce operating costs for the combined company.

And the connections Peloton currently has with the Apple Watch and other hardware can be either broken, or Peloton could preference Garmin hardware the same way Apple does with its own hardware and software.

This is bundle economics 101. Grow the pie and add more value to a wider range of users.

Adding the current subscription prices of Peloton and Garmin together and buying a la carte would be more money, but bundling at a lower price expands the market dramatically. It may even bring the total premium subscriber number from 3 million to 10 million, or more!

The tradeoff is worth it.

Peloton currently has an enterprise value of $3.6 billion, and a $4.5 billion deal value — or a 32% premium from Peloton’s price today — would be hard to pass up for investors.

For Garmin, the company could pay cash from its $2.5 billion in cash and take out $3-4 billion in debt to get the deal done. And both companies are generating positive free cash flow, so the debt wouldn’t be burdensome to pay off.

I think the opportunity to become a more holistic health and fitness company is in Garmin’s best interest. The company needs more hardware options for users and a subscription offering to add value to each subscriber and make the hardware ecosystem sticky. Peloton does that.

And Peloton isn’t an impressive standalone company. Who else buys them? (Don’t say Apple)

This deal makes too much sense for everyone involved.