Asymmetric Investing Spotlight: Peloton

Peloton started in 2012 and offers at-home fitness hardware and software services to its members. Its classes are streamed around the world by millions of users who have proven to be extremely loyal.

While this was a pandemic darling, the stock has fallen 95% from its all-time high. This creates an opportunity for new investors today.

So why Peloton stock?

Peloton messed up its business during the pandemic—there’s no denying that. Costs got out of control and inventory was a mess. But it answered the biggest questions investors can have about a streaming home fitness company. It reached scale by attracting millions of loyal users worldwide.

Now that it has amassed over 3 million paying monthly subscribers, Peloton has the best way to play the at-home fitness business in what may end up being a winner-take-all market.

As equipment distribution moves to third parties and Peloton works to grow its app-only pipeline, this is a company that should move hardware sales to a more variable cost model and have SaaS-like economics with high operating leverage in the subscription business. If the user base grows, the stock could 10x over the next decade.

The Key Stats

Peloton by the numbers:

• Company: Peloton

• Ticker: PTON

• Market Cap: $3.2 billion

• Revenue (ttm): $3.05 billion

• Gross Margin (ttm): 19.9%

• Operating Margin (ttm): -43.4%

• Net Income (ttm): -$2.76 billion

• Shares Outstanding and Y/Y Growth: 341.9 million and 1.2%

• Earnings per share (ttm): -$8.13

• FCF (ttm): -$1.50 billion

• Date Founded: January 3, 2012

• Founder: John Foley

Peloton’s Leadership:

• President & CEO: Barry McCarthy was CFO at Spotify from 2015 to 2020 and was CFO of Netflix from 1999 to 2010. He was brought in in 2022 when John Foley was pushed out of the company.

• Chair of the Board: Karen Boone has been on the board since 2019 and was an executive at Restoration Hardware from 2012 to 2018.

Since Foley was pushed out following Peloton’s strategic mistakes late in the pandemic, McCarthy has been given reign to run the company. None of the board members have long ties to the company or hold a significant portion of the company’s stock. Insiders hold only 2.3% of outstanding shares.

The Strategy

Peloton has a razor/razor blade business model. The company sells bikes, treadmills, and rowing machines at a small loss, hoping to make it up on the back end with high-margin subscriptions.

What’s unique about Peloton’s competitive position is that its closest competitors are in-person gyms. This is an adjacent experience to Peloton but creates a typical physical-to-digital competitive dynamic between gyms and Peloton. A gym can only service a limited number of customers at a time, in any given geographic location. Peloton can serve an effectively infinite number of customers with ANY content at ANY time. It’s similar to an online news source competing with the local newspaper, or Netflix competing with cable TV.

What Peloton touts as its advantage is a wider range of classes than any gym, on-demand classes, and a price point of just $44 per month. This compares to in-person gyms that can cost over $300 per month and have been raising prices like crazy. For example, in the most recent quarter, Life Time increased average revenue per member by 19.4% to $213 per month!

To understand Peloton’s business more, let’s dig into the two business segments.

The Hardware Strategy

Peloton sells three major products: a bike (which comes in two models), a treadmill, and a rowing machine. These products constitute a vast majority of what the company calls “Connected Fitness Products” revenue.

The sale and distribution of these products are where Peloton changed strategies dramatically over the last two years. Coming into the pandemic, the company was selling equipment online and in-store for high prices, which would then be delivered to your house with a “white glove service”. Now, it’s closing stores and pushing distribution to partners like Amazon and Dick’s Sporting Goods. Dick’s gives the option to get home delivery and assembly, but you can also pick up the box and assemble the Peloton yourself.

The price of bikes has also come down significantly over time in an effort to build a larger user base. This new distribution model matches the wider base of the business today.

Over time, hardware will be a less meaningful piece of Peloton’s business. The company is working to make the app more appealing to owners of third-party hardware, effectively making Peloton a fitness solution for any place, any time, and any equipment. Peloton hardware was a Trojan Horse it used to build a digital fitness platform.

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