Barron's Streetwise - ICON v. Peloton: The Connected Fitness Race

Episode Date: February 5, 2021

Scott Watterson, CEO of NordicTrack owner ICON, on the boom in home training. Plus, investing in lab-grown meat. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. I use a term called automagic. The user experience operating system actually connects to the exercise device, changing the incline, the speed, the resistance automagically.

For example, we have a lot of outdoor activity workouts where you climb Kilimanjaro. Well, you actually climb the exact angle of descent and ascent that Kilimanjaro is on. You step per step go right up to the top of Kilimanjaro. Now, in my case, it took me two weeks to get to the top, but I did ascend to the top of Kilimanjaro. I did it in my basement. ascend to the top of Kilimanjaro. And I did it in my basement. Welcome to the Barron's Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Scott Watterson. He's the CEO and co-founder of Icon Health and Fitness, which makes exercise machines under brands like NordicTrack and ProForm, and more importantly, owns a subscription service called iFit. That

connects customers and their machines with live classes or recorded workouts in attractive outdoor locales. Connected Fitness has boomed during the pandemic, sending shares of Peloton and Nautilus soaring, which means conditions could be perfect for Icon and other fitness players to go public. Listening in is our audio producer, Metta. Hi, Metta. Hey, Jack. I am pleased to announce that I've lost a bowling ball.

Oh, where did you leave it? I last had it around my waist and chin and maybe rear end, because I'm talking about a bowling ball worth of body weight. I had put on some pandemic pounds. I'm sure you didn't notice on those conference calls, Meta. I did not. I swear. Well, I realized something had to be done when I saw myself on TV dressed as Wonder Woman. And it's a long story,

but the short version is I appear each week on a show called Baron's Roundtable, and I lost a bet on the show related to the theater release date of Wonder Woman 1984. And as payment for losing the bet, I had to wear a costume on the Christmas episode of the show. I told my boss at the magazine to expect to see an expense report for a corset and a golden lasso, and he seemed to take it in stride. Anyhow, when I saw myself on the show, I didn't think about truth and strength and fighting the forces of evil. I thought, great Hera, I am one chunky Wonder Woman. So, the day after Christmas, I downloaded an app called Lose It, which is for tracking calories. And when I lost five pounds, a picture of a dog popped up, and it said,

You've lost the weight of a mini French bulldog. You're re-barkable. It also said, That's pawesome! with an exclamation point and I felt pawsome. When I lost 10 pounds it said imagine yourself no longer carrying around a watermelon. Well I recently hit 15 pounds and I said that's the weight of a large bowling ball. I guess you could also say I'm down three mini French Bulldogs. I've been walking for exercise, but we just got two feet of snow in New York. I used to have a family membership in one of those big health clubs with tennis and basketball and swimming and kids' playrooms. But I don't think we're going back until we and most people we know have gotten COVID vaccines.

I think that means I'm in the market for a home exercise machine. And those all seem to have sprouted enormous TV screens with trainers and classes and cloud-based statistics and videos. Wall Street calls that trend connected fitness, and investors seem pretty excited about it. We've been talking about it all morning. Peloton, the luxury fitness company that has taken the world by storm with its interactive in-home bike. It's set to make its market debut on the NASDAQ in just a little bit. When Peloton went public in September of 2019, it was described as the Netflix of fitness. It sells exercise bikes with those big screens that allow riders to virtually attend live classes. That means that instead of just paying for the bikes,

users also pay a monthly service fee. And that's an important distinction for investors. When you're selling any piece of hardware, manufacturing costs rise with sales, which means profit margins only grow so large. But when you sell software as a service, But when you sell software as a service, costs stay the same as sales rise. The business becomes endlessly scalable and profit margins can grow quite large. Peloton's IPO valued the company at $8 billion, but its shares fell on the first day of trading, cutting the company's value to closer to $7 billion. Investors at the time had turned cautious on companies that weren't yet profitable. Chewy, the online pet shop, and Slack, the

messaging platform, were also trading below their IPO prices. What happened next for Peloton stock was not much at all until around April of last year when the stock market was recovering from its pandemic low point, and investors started thinking about how life might change with so many people locked at home. Peloton shares began rising quickly, and sure enough, the company reported massive gains in its number of Connected Fitness subscribers. Recently, the company's stock market value was up to $43 billion. Today, Peloton also sells treadmills, and its app works with other types of exercise, like running. In December, it announced the acquisition of Precor, a maker of exercise machines, which could give Peloton new types of machines to connect, as well as more factory space to keep up with

customer demand. While all of this was going on as well as more factory space to keep up with customer demand. While all of this was going on, something even more remarkable happened with a company called Nautilus, which owns not only the Nautilus brand of exercise machines, but also Bowflex, which I remember from the 1990s for its plateless strength machines and shirtless commercials. plateless strength machines, and shirtless commercials. Bowflex is faster, and it's easier to use. Bowflex is more effective and offers about twice as many exercises than other machines. Nautilus was left for dead on Wall Street last spring, trading it just over a dollar per share.

Recently, it sold for over $24. Why? If you guessed anything other than Connected Fitness, kindly punish yourself now with a minute of jumping jacks while listening. Meta, some heart-pumping gym music, please. It was Connected Fitness. Nautilus had rolled out a subscription platform called JRNY, which I guess is pronounced Journey. And late last year, when the company launched a big screen exercise bike that can lean from

side to side, Peloton shares briefly fell in response. Suddenly connected fitness products are everywhere. Apple has a pay service called Fitness Plus with workout videos that integrate with its watches. I've done some of those Apple workouts and they seem pretty good. The next one up on my queue is called Absolute Beginner High Intensity Interval Training with Jamie Ray. Be there soon, Jamie Ray. I like the sound of beginner more than I do the high intensity part, but let's see. Amazon has a fitness band called Halo. Lululemon, a maker of yoga tights, bought Mirror, which offers virtual coaching for cardio workouts built into a mirror. There are plenty of private players in connected fitness, and some of them could become takeover targets. We've talked about this before. There's

been a recent flood of what are called special purpose acquisition companies or SPACs and they've raised money with the goal of shopping for private companies to buy. Among the private players in connected fitness are hydro for rowing, tonal for strength training, and fight camp for boxing. At this point, it's hard for me to think of a gym exercise that doesn't have a connected version that customers can do at home with a virtual coach. Maybe that thing I've seen at the gym where the guys grab the ends of two big ropes and beat the floor with them. What the heck is that thing, Matt? Have you seen that? It's my favorite exercise, personally. I do that all the time.

I should have known. It looks very Rocky IV. I wear a bandana when I do it. Well, I don't think those ropes of yours are connected yet on the internet, although I guess there could be a startup out there called Ropey Fit or something like that. Anyhow, everything else seems connected. And to learn more about where that leads the industry, I checked in with a guy who quietly runs one of the biggest home fitness subscription platforms out there. Hey, Scott,

how are you? Hey, how are you doing, Jack? Doing well. I'm underdressed. I would have wore a jacket if I knew we were doing video. But at least it's a sweater and not pajamas. There you go. There we go. There we have it. Oh, that's good of you. Thank you.

That's Scott Watterson, co-founder and CEO of Icon Health and Fitness, taking off his sport coat to make me feel less underdressed. off his sport coat to make me feel less underdressed. Icon traces its roots to a company called Weslo, founded in 1977, about as far from the fitness business as you can get. As a company, we were selling wood-burning stoves, if you can imagine this. And it was a great business, except for when the summertime came, when the snow melted and there weren't very many people that had an interest in buying a wood-burning stove in the middle of summer. So we got into the except for when the summertime came, when the snow melted and there weren't very many people that had an interest in buying wood-burning snow in the middle of summer. So we got into the big trampolines. Then that got us into the mini trampoline, which gets us into the fitness

industry. Your burning passion can be traced back to actual burning in stoves. Can you believe that? Weslow, which was eventually renamed Icon Health and Fitness, went through a string of transactions, including buying NordicTrack in 1999. I've lost 10 pounds since I started with my NordicTrack. I lost 20 pounds without any dieting at all. They originally became known for cross-country skiing simulators. And there were commercials years ago that said, Inside your body is a better body. Inside your body is a better body.

A NordicTrack body. Millions of people have discovered it. I'm pretty sure inside my body is the body of someone who prefers downhill skiing to cross-country. But anyhow, NordicTrack still sells ski machines, but you'd hardly know it. Today, the brand has treadmills, bikes, rowers, and elliptical machines with giant touchscreens up to 32 inches. And it makes something called the Vault, which looks a bit like an iPhone as big as a person. It's a giant mirror that doubles as a video screen with coaching, and the mirror opens into a storage cabinet for weights and other equipment.

And behind it all is a subscription service called iFit. Scott told me the company has up to 5 million members, a million of which are paying subscribers. Peloton this past week reported fewer total members than Icon, but more than twice as many paying subscribers. It said its subscriptions doubled over the past year. Simon Siegel, an analyst at BMO Capital Markets, wrote this past week that he's positive on Peloton the product, but that the shares have detached from reality. He points out that Peloton's recent stock market value made it 22% of the size of Netflix, even though its subscriber count is only 1% that of Netflix. But Peloton's high stock price might be a good sign for Icon,

which was last valued in an October funding round at around $7 billion, close to Peloton's price just after its IPO. Scott says he's confident that the home fitness business will continue to thrive beyond the pandemic. Connected fitness existed before the pandemic. It's accelerated through the pandemic. It's just obviously people for not just the gym issue, but people all around know they have to be fit to withstand and overcome the weaknesses that we found ourselves faced with through this pandemic. And will it continue? Yeah, of course it will. There's just more people. Scott says the business isn't as seasonal as it used to be and that it's not just about losing weight.

business isn't as seasonal as it used to be and that it's not just about losing weight. People are looking at more from a health, if you will, and a wellness perspective from reducing your risk of cardio disease, of lowering your blood pressure, of mental health. You've seen through the pandemic, for example, there's been a lot of stress, mental stress, depression, anxiety going up. And the best solution again for that is to engage your mind on a physical exercise device in a way that changes your mental state of being. Now that I'm in the market for one or more exercise machines, I'm thinking about the software platforms. In the past, it might have been okay to buy, let's say, a Peloton bike, a NordicTrack treadmill, and a Hydro rower. But if I do that now, I'll have three different software platforms with three different monthly subscriptions. It just seems more sensible to

think about which brand can provide multiple machines on the same platform with one monthly charge. I asked Scott, at this point, are you selling the machines or the same platform with one monthly charge. I asked Scott, at this point, are you selling the machines or the software platform? So, Jack, we're trying to do both, and I think anybody who's in the market needs to appreciate why both matter. Both the hard good or the equipment and the content and how they interact. Scott says his machines can adjust the difficulty for the user's heart rate to keep him or her in the ideal zone. He has an exercise bike with a motor that can make it incline and decline to simulate, let's say, hills in San Francisco.

He says his live trainers know how to meet users where they are fitness-wise and build from there, and that his recorded workouts are like seeing the world with exercise. We do series. So it's a two-week series. And we're not only going to take you to some exotic places throughout the world and get you a chance to see the world. Like I enjoy going to King Tut's tomb, but I get to be physically exercised

and I go through a progression through that experience. And that's just unbelievable because the sensory experience is great. It's kind of like the difference between going to a backyard amusement park or going to Disneyland or Disney World, where their rides are so immersive and interactive. And it puts you right in that experience. I asked Scott what new programs his people are working on. He says there's more world travel coming and progressive programs for people who want to work their way up to, let's say, running a 5K or the Boston Marathon. I asked him which machine is the best to start with. I mean, something like the Vault, that big mirror thing I mentioned, I guess that seems good for toning and overall fitness, but then a treadmill or a bike would probably open up more world travel options. Scott says the most important thing is just to get

started. I'm wondering whether and when Icon will go public. The company must feel pretty good about this ferocious demand on the part of investors for connected fitness stocks. Future IPO plans aren't the kind of thing CEOs like to talk about. I asked Scott about it and he smiled and said, let's talk more about fitness machines. Fair enough. Part of Icon's business is supplying gyms with machines. I asked Scott, should gyms be worried about the rise of connected fitness at home? He says no. We've signed a very great partnership, long-term partnership with Planet Fitness. They're the largest gym on the planet.

And what they see and what we see is we want to take care of the customer. So when, as the gyms open and as more and more people go back to the gyms, they still need to have a better experience. And that better experience is having content that's personal, interactive, real coaching inside of, say, a Planet Fitness. That digital experience will be the standard in the club space going forward. Thanks for talking it over with me, Scott. I'll be interested to see in the years ahead which fitness platform emerges as the true Netflix of the business and whether Icon and some of the others go public and how they perform and what effect that has on the performance of existing stocks like Peloton,

and whether some of the startups consolidate into larger companies. As for me, I'll have to think for a little longer about what kind of connected fitness machine to buy for my home. Inside my body, there might just be a better body. Just need to get through a couple more bowling balls first. Don't forget the mini bulldogs and the watermelons too. Thank you, Meta. Meta, how about we answer a listener question? Sure. We have one from Jim from Bainbridge Island. That's near Seattle. Great. Let's hear it. Hey, Jack, love your podcast. I'm interested in finding a way to invest in the cultured or cell-based meat industry, investing in companies like Memphis

Meats. Are there any means for small investors to participate and make money in this emerging, albeit higher risk industry? And by the way, would you or Meta ever envision taking a bite of a cell-based chicken burger? Thanks, Jack. Thank you for the question, Jim. Meat substitutes have come a long way. For many years, vegetarians had to settle for veggie burgers that looked and tasted like sat-on falafels. And now they have plant-based options from companies like Beyond Meat and Impossible Foods that meticulously simulate meat right down to the blood that provides the juiciness. In 2019, I took the family to a Red Robin to do some field research for a column. I had their Burnin' Love Burger made with beef, side by side with their Impossible Burger made from plants.

The Impossible Burger was good. My wife and daughter said it tasted just like beef. My son wouldn't try it. The only tell for me was the springy underbun. The underbun of my Burnin' Love Burger was semi-soggy with grease, and I mean that affectionately. The underbun of my Impossible Burger was still springy and bready. All told, I haven't switched to plant-based burgers, but I wouldn't turn one down. Now, your question, Jim, is about the next step in meat simulation, growing actual meat, not on an animal, but in a lab.

For example, there's a U.S. company called Eat Just that makes chicken bites by growing chicken cells in a bioreactor and then adding plant ingredients. In December, it won approval by Singapore's food agency to sell its chicken bites, and that's a first. Would I try cultured meat? I think so. I mean, definitely if it was breaded with a dipping sauce and after I'd had maybe two beers, I guess I'd try it plain too if I want to write about it once it becomes a little more investable, but I'm probably not getting onto a plane to Singapore for that. Meta, when I try lab-grown chicken, you want to try it with me? I think I would. All right, we'll have a couple of

test tubes of whiskey to go with that. Jim, that brings me to your main question. Is lab-grown meat investable? The answer is mostly no, but a little bit yes. And depending on your interests, you might not love the yes part. There are many companies working on cultured meat. You mentioned Memphis Meats. I mentioned Eat Just. on cultured meat. You mentioned Memphis Meats, I mentioned Eat Just, and there are more. Mosa Meat,

Future Meat Technologies, and Meatable, to name a few. None are publicly traded. But don't forget, as we touched on earlier in this episode, there are hundreds of SPACs that recently raised money with the goal of finding private companies to buy and take them public. So if a SPAC snaps up one of these companies, presto, you have a cultured meat stock to size up. For now, I guess you could invest in a company that is decidedly more into meat than it is into meat substitutes, and that's Tyson Foods, ticker TSN. It processes cows, pigs, and chickens, which is a nice way of saying it turns them into food. It also has investments in plant-based burgers and cultured meat. In 2019, shortly after my Red Robin taste test, Tyson sold its holdings in Beyond Meat and announced its own plant-based

burger line called Raised and Rooted. One of the benefits of having a distribution network, including warehouses and refrigerated trucks, already in place is that Tyson can move quickly on new products. Its Raised and Rooted line is already in more than 10,000 U.S. stores, and it's making its way to Europe. Tyson also owns a stake in Future Meat, one of the cultured meat startups. Jim, if your goal is to invest in cultured meat because you find the meat industry objectionable, either for environmental or ethical reasons, you probably won't love the Tyson idea. And if your goal is to make money on what you believe will be a big new growth market, Tyson still might not be a great fit for you because overwhelmingly,

most of its exposure is to burgers and pork chops and chicken wings that we Americans will be grabbing after this weekend during the Super Bowl. But I bet you'll find pure play investment opportunities in cultured meat soon. Thank you Jim from Bainbridge Island for for sending in your question. And everyone, please keep the questions coming. Just tape on your phone. Use the voice memo app. Send it to jack.how, that's H-O-U-G-H, at barons.com. And we have a special listener question episode coming up.

Thank you for listening. And if you're still doing jumping jacks from earlier, you can stop now. Metalootsoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, please write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.