Peloton might have difficulty scaling its business. The stock falls 8 percent after opening below its initial public offering (IPO) in market debut. The Slump will most likely continue because its products and subscriptions are too expensive. The company’s bikes and treadmills cost $2,000 and $4,000, respectively.
The IPO was overpriced. The lead underwriter, Goldman Sachs, has done a great job at the roadshow convincing investors to buy in, but $8 billion-plus valuation is bubble-like for the digital fitness company.
Metrics like 1.4M+ total members and 95 percent 12-month retention rate are great. 55M+ total workouts in fiscal 2019 is a bogus metric, and $915M revenues with a net loss of $195.6M is a head-scratcher.
I like its 43 percent margin on Connected Fitness Products–bikes and treadmills. Peloton has enough room to reduce its prices on those products and acquire new customers that might not have the disposable income to dump on a 4,000-dollar treadmill.
However, its margin on subscription is a concern. At 40 percent, it is lower than the margin on connected fitness products. The lower margin on subscription means that it’s expensive for the company to acquire new clients and retain them for those 12 months mention-above.
Of course, Peloton Interactive is a startup. All startups require their investors to be patient. However, a 4,000-dollar treadmill plus a Connected Fitness Subscription for $39.00 per month and a Digital Subscription for $19.49 per month is what I call the “ boom-economy business” model. This type of business model does not do well in an economic recession.
There has been a bifurcation going on in the retail industry where Neiman Marcus and TJ Maxx are thriving, but JCPenney and Macys are struggling. Peloton Interactive might be the Neyman Marcus of digital fitness. Only an economic recession can test that assumption.
According to Pelonton’s S-1 Form, its business model is “high growth, strong retention, recurring revenue, margin, expansion, and efficient customer acquisition.” That model might not maximize shareholder value.
