Peloton’s Risky Business Model

Peloton, the New York-based company that offers an at-home fitness experience meshed with digital streaming content and progress tracking, filed its S-1 prospectus on Tuesday in anticipation of its upcoming initial public offering (IPO). The plan is to go public with a stock listing on the Nasdaq Stock Exchange under the ticker symbol “PTON”. The latest round of funding pegged the company’s valuation at $4 billion, and some recent estimates say its now worth as much as $8 billion. But buyer beware, the company’s business model comes with its own unique set of risks.

Peloton has shown some impressive revenue growth over the past few years. Between 2017 and 2018, revenue grew by 99.0%, and over the past year it has grown another 110.3% for a total revenue stream of $915 million at the close of the 2019 fiscal year, which ended on June 30. But losses are now accelerating at an even faster rate. Total net losses fell 33% between 2017 and 2018, and then rose last year at a pace of 308.4% to reach a total net loss of $195.6 million at the end of fiscal year 2019.

What It Means for Investors

The startup dubs itself a technology, slash media, slash interactive software, slash product design, slash social connection, slash, direct-to-consumer, multi-channel retail, slash apparel, slash logistics company offers customers two main products and one primary service. To keep it simple, think of the company as operating in the market of connected fitness, blending the physical and digital worlds to create a unique fitness experience. 

It’s a market that is still young and growing. But it’s also already highly competitive. A number of connected fitness devices and apps already exist, such as Fitbit Inc. (FIT) and Nike Inc.'s (NKE) Nike Run, and fitness fanatics can access a host of exercise videos using free streaming services like YouTube. Peloton’s future success will depend on that market continuing to grow and its ability to offer something unique.

The company’s stationary bike might be the product that hits that niche. It is equipped with a touch-screen tablet allowing viewers to watch live-stream or on-demand videos of fitness instructors leading a workout. It manages to combine the fitness device, the progress-tracking application, and the online streaming content into one package for $2,000. So far, bike sales make up a significant majority of Peloton’s revenues.

For a stationary fitness bike an $8 billion valuation seems steep. But of course, Peloton’s also got a treadmill and a connected fitness subscription, in order to access the streaming content, for $39.00 a month. The bike is the platform for the subscriptions—sell the bikes, and the subscriptions will follow. It’s not unlike Apple Inc.’s (AAPL) iTunes–iMac/iPhone combinations, and Peloton’s CEO John Foley boldly compares his own company to that of the iPhone maker.

The company’s connected fitness subscriptions have risen from 107,708 in 2017, to 245,667 in 2018, to 511,202 in 2019, for a corresponding growth rate of 128% between 2017 and 2018, and 108% from 2018 to 2019. Peloton claims a 95% 12-month retention rate, and its net average monthly churn rate for each year staring in 2017 and ending in 2019 was 0.70%, 0.64% and 0.65%. It will be important for the company to maintain its brand value and reputation if it is going to continue attracting and retaining customers.

Looking Ahead

Peloton will also need to maintain good relationships with its suppliers, manufacturers, and logistics partners, as it relies on only a limited number of those. And don’t forget, the company depends on third-party licenses for the use of music in their streaming content. In March, Peloton was sued by a group of music publishers who alleged that the company used more than 1,000 songs from a range of different popular artists without permission. It’s important that users listen to their favourite music, but Peloton will have to make sure they provide that service legally.