August 29, 2019

Breakingviews: Peloton’s tech claims depend on too much spin

by Breakingviews.

Peloton Interactive’s claim of tech status depends on too much spin. It’s true that like many companies that have recently floated shares or plan to do so, such as Uber Technologies and The We Company, the stationary bike outfit burns lots of cash and gives founders supervoting rights. But Peloton’s core business needs to retain online customers in an exercise market prone to fads. That’s far from a sure bet.

Sales pitches for initial public offerings contain a fair amount of hype, and Peloton doesn’t hold back in its prospectus. It calls itself a technology, media, software, product, experience, fitness, retail, apparel and logistics company.

That’s a lofty way to describe an interactive twist on old-fashioned exercise equipment. Its bikes, and now treadmills, allow users to take online classes or compete against others from home. Sales of gear and subscriptions are soaring, with revenue more than doubling over the last four quarters, to $915 million.

Peloton, named after the main pack of riders in a cycling race, has yet to say how many shares it is selling, or what valuation it seeks, but a funding round last year valued it at over $4 billion. It will probably seek a higher valuation from the IPO, given its growth and Wall Street’s ardor for subscription and technology businesses.

Yet Peloton has never made money, and its operating loss ballooned fourfold over the last four quarters, to $202 million. Moreover, nearly 80% of revenue comes from selling gear. Presumably users won’t replace bikes often, and the rapid growth of the business will increase the amount of secondhand equipment for sale. The cadence of equipment sales will probably slow, or even go into reverse, at some point.

The business may be sustainable if users keep subscribing. While the company touts an average monthly churn of less than 1% per month, rapid growth means this number should be taken with a big grain of salt. What’s fun for a few months may seem boring after several. Exercise trends can be fickle as the sudden popularity of things like step classes, Zumba, NordicTrack exercise equipment and PX90 gear lose ground to the next new sensation.

Cycling will always have its fans, but a crowded peloton increases the risk of an eventual pileup.

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