Breakingviews: Peloton fails one of finance’s oldest workouts

The fitness industry strives to find new ways to do a very old, very simple thing. Peloton Interactive, which sells high-priced treadmills and exercise bikes with live-streamed group classes, showed on Thursday why that makes for a risky investment opportunity. The company’s stock priced at a valuation of $8.1 billion on Wednesday evening and promptly sagged more than 10% on its first day of trading.

Peloton’s worth hinges on rapid growth and rising gross profit margins. The company hopes its $2,000 bikes and pricier treadmills could reach one in 10 U.S. households – lots of room for growth from the current one in 200 or so, based on numbers in the company’s initial public offering prospectus. Peloton loses money, but touts positive trends in “connected fitness churn” and “subscription contribution margin.”

Yet more traditional ways of weighing up companies are useful. Consider the Five Forces, a 40-year-old model for evaluating investments. Harvard professor Michael Porter proposed assessing companies based on the threat of new entrants, industry rivalry, the threat of substitutes, buyer power and the leverage held by suppliers.

On most of those filters, Peloton looks anything but fit. Rivalry is intense, from connected device-makers like Fitbit and GoPro to other at-home fitness equipment makers. New entrants are coming thick and fast, from Zwift to Mirror. The company’s suppliers arguably have too much power: it gets 91% of its equipment from just four of them. Buyers are dispersed, but can cancel their subscriptions at any time.

The biggest risk is that the number of ways to get fit is limitless. Uber Technologies’ car-hailing customers can defect to Lyft; WeWork may lose its shared-office tenants to IWG. For Peloton, though, the next big threat could be anything from a trendy new running shoe to a hula hoop paired with an iPhone.

That puts a question mark over whether the company run by John Foley (no relation of this columnist) will still be growing a few years from now, whether a valuation of more than 8 times revenue is justified, and whether its roughly $200 million annual operating loss will ever become a profit. Customers may want to get fit, but unfortunately for Peloton they’re already flexible.

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