Peloton has big ambitions, big IPO as competitors loom

Peloton's IPO cashes in on what is a connected fitness phenomenon, but it also sees itself as a media, technology, retail, and product design firm. Peloton's biggest risk may be a lack of future focus.

peloton-opener.png

Peloton is teeing up its initial public offering, with the aim of being a connected fitness, media, technology, product design, and retail juggernaut. Add it up, and Peloton's biggest risk may be a lack of future focus.

Also: Best Peloton alternatives: Top smart exercise bikes

Now there's a lot of technology behind Peloton, including algorithms for music selection, media production, product design, and supply chain and logistics optimization. And, clearly, Peloton has had success. It sold 577,000 connected fitness products, with subscriptions ranging from $19.49 to $39 a month. Peloton had 511,202 connected fitness subscribers at the end of fiscal 2019.

Peloton priced 40 million shares at $29, the top of a $26 to $29 IPO range. Shares of Peloton closed $25.76, down 11%. Going forward, a lack of focus could be worrisome. Can Peloton really be a big mashup of technology, fitness, retail and media innovation?

Today, Peloton looks focused enough. It is focused on spin classes and its bike, as well as a new workout effort with a treadmill called Peloton Tread. Over time, Peloton may be inclined to stray into new markets. This excerpt gave me pause:

We are a technology company that meshes the physical and digital worlds to create a completely new, immersive, and connected fitness experience. We are also:

…a media company that creates engaging-to-the-point-of-addictive original programming with the best instructors in the world.

…an interactive software company that motivates our Members to achieve their goals.

…a product design company that develops beautiful and intuitive equipment that anticipates the needs of our Members.

…a social connection company that enables our community to support one another.

…a direct-to-consumer, multi-channel retail company that facilitates a seamless customer journey.

…an apparel company that allows Members to display their passion for Peloton.

…a logistics company that provides high-touch delivery, set up, and service for our Members.

That company description sounds a bit like what Amazon has become. Here's the catch: Amazon's 1997 IPO filing simply described the company as "the leading online retailer of books." Amazon cited selection, no real estate expenses, and 24/7 service and shopping. Amazon Web Services, last-mile logistics, Amazon Prime, new categories, video content, Kindle, Alexa, and a bevy of devices all came later.

John Foley, CEO of Peloton, said in a shareholder letter:

Peloton is so much more than a Bike -- we believe we have the opportunity to create one of the most innovative global technology platforms of our time. It is an opportunity to create one of the most important and influential interactive media companies in the world; a media company that changes lives, inspires greatness, and unites people. And it is an opportunity to create one of the best places to work in the cities where we operate -- we prioritize culture as much as any other business objective.

Sure, Peloton laid out big ambitions for what a business that is essentially a virtual gym. When you consider that Peloton churns out 950 original programs a month, the company could be a fitness media company that is hardware agnostic. Peloton is a cross between Les Mills and a high-end health club, with a dash of bike and treadmill manufacturer. Yes, Peloton can leverage its 1.4 million members of its community, a low churn of 0.65%, and word-of-mouth marketing. But there are more than a few moving parts to consider.

The biggest item to ponder when it comes to Peloton is the competition. Echelon is ramping up marketing, with lower prices and rest assured every company that makes an indoor cycle such as Nautilus, which owns Schwinn, NordicTrack, and Soulcycle will have some Peloton rival.

Here's a look at some of those other parts.

  • Peloton ended fiscal 2019, with a net loss of $195.6 million on revenue of $915 million. The majority of revenue is tied to upfront sales of equipment for more than $2,000.
peloton-tam.png

  • The company said that its fiscal 2019 lifetime value per subscriber was $3,593. Net customer acquisition costs were $5 per connected fitness subscriber added. 
  • Peloton reckons that its total addressable market is 67 million households.
peloton-workouts.png

  • The company did mention that companies are offering wellness benefits to employees and that reality could fuel future growth.
  • Boutique fitness has surged in the US and that is helping Peloton's case, but it will have to expand the market more.
  • Connected fitness subscribers on the Peloton platform completed 11.5 workouts per month in fiscal 2019. That's almost three workouts a week.
  • Peloton's Net Promoter Scores have been between 80 and 93 since it began measuring it in 2016.
  • The company is planning a research and development facility at its New York headquarters as well as state-of-the-art production studios. "We will continue to invest heavily in a variety of software and hardware engineering functions, supply chain operations, manufacturing, and advanced quality assurance to support our growth," said Peloton.

What was missing in Peloton's IPO filing was a lot of talk about technology. There were 65 mentions of technology in the prospectus, no mention of algorithms or data science, and five mentions of information technology. The danger for Peloton is that its media, content, and equipment can be undercut on pricing by rivals.