Exercise tech company Peloton filed confidentially for IPO this week, and already the big question is whether their last private valuation at $4 billion might be too rich for the appetites of public market investors. Here’s a breakdown of the pros and cons leading up to the as-yet revealed market debut date.
Risk factors
The biggest thing to pay attention to when it comes time for Peloton to actually pull back the curtains and provide some more detailed info about its customers in its S-1. To date, all we really know is that Peloton has “more than 1 million users,” and that’s including both users of its hardware and subscribers to its software.
The mix is important – how many of these are actually generating recurring revenue (vs. one-time hardware sales) will be a key gauge. MRR is probably going to be more important to prospective investors when compared with single-purchases of Peloton’s hardware, even with its premium pricing of around $2,000 for the bike and about $4,000 for the treadmill. Peloton CEO John Foley even said last year that bike sales went up when the startup increased prices.
Hardware numbers are not entirely distinct from subscriber revenue, however: Per month pricing is actually higher with Peloton’s hardware than without, at $39 per month with either the treadmill or the bike, and $19.49 per month for just the digital subscription for iOS, Android and web on its own.
That makes sense when you consider that its classes are mostly tailored to this, and that it can create new content from its live classes which occur in person in New York, and then are recast on-demand to its users (which is a low-cost production and distribution model for content that always feels fresh to users).
All that said, its hardware is the key defining factor that separates Peloton from the many, many exercise app makers and content providers that litter the web. This market is also in a race to zero, thanks to the prevalence of readily available free workout and fitness coaching pushed through channels like Amazon, where influencers give it away for free in pursuit of other revenue opportunities including brand sponsorship.
Peloton is differentiating its hardware somewhat beyond the connected features, with relatively space-saving designs, and the 22-inch touchscreen display upon which users can access the interactive training programs. The newer treadmill has an even larger 32-inch screen, has been praised for the durability of its actual treadmill belt, as well as its integrated audio (with Bluetooth) and new mechanisms for adjusting incline and speed.
But in seven years of operation, Peloton has put out exactly two pieces of hardware, and seems unlikely to ramp that pace. The cost of their equipment makes frequent upgrade cycles unlikely, and there’s a limited field in terms of other hardware types to even consider making. If hardware innovation is your measure for success, Peloton hasn’t really shown that it’s doing enough in this category to fend of legacy players or new entrants.
There’s also the cyclical and generally fickle nature of consumer interest in fitness equipment and programs – anyone can probably rattle off a litany of come-and-gone gadgets, routines and diets. And there’s also a tendency for people to pivot over time from favoring solo, at-home workouts, to doing more class-based communal activity (Peloton actually rose on the general wane of the spin fad, for instance)
Finally, while Peloton’s focus on a single live classroom is smart in terms of production costs for content, it’s a potential risk in terms of how much value its users ascribe to its trainers. Shai Goldman on Twitter noted that there are five of Peloton’s ten total trainers who hold special sway over the user community, and these could conceivably be convinced to head elsewhere for a larger paycheck.
Why the company could succeed
(Photo by Kimberly White/Getty Images for TechCrunch)
Peloton definitely has challenges, but it has some key strengths which can’t be ignored, too. One is that it is apparently profitable, according to Foley in an interview last year. That’s not at all a given for a tech company debuting on the public market, and could be a strong indicator of confidence for potential investors.
Self-reported revenue for Peloton’s fiscal 2018 was on track for $700 million as of late last year, nearly double the $400 million it claimed for 2017. Those are great numbers, provided the company can continue this trajectory and shows signs of having historically had at least as strong year-over-year performance, rather than a tapering over time.
Another good sign for the IPO is that the secondary market interest for its pre-IPO shares seems strong. Secondary marketplace Forge’s VP of Marketplace Javier Avolos told TechCrunch that Peloton has shown promise on his company’s platform to date:
“Investor interest [in Peloton] has been consistently strong from both institutional and retail investors. Our view is that this is a result of perceived strong performance by the company, a clear path to a liquidity event, and historically low availability of supply in the market due to restrictions around selling or transferring shares in the secondary market.”
He noted further that availability of Peloton shares has been limited on its platform. We could read into this a sign of the confidence existing investors place in the business.
Peloton also has, as mentioned above, a model in which it can produce content relatively cheaply and then repurpose and redistribute it broadly to its install base at virtually no cost. There are risks associated with having a lot of the perceived value of this programming reside in a relatively small talent pool, but as of yet, there are still relatively few options should said talent wish to depart to a competing service.
One more area to watch: Peloton’s commercial deployment. The company launched a commercial version of its bike targeted at gyms, hotels and other corporate customers in early 2017. We don’t yet know how well this aspect of the business is performing, but it’s a hedge in case the at-home fitness trends experiences a significant change in headwind, and one whose true costs vs. the primary business come mainly through building out and maintaining an effective enterprise sales organization.
First or only?
Peloton’s performance on the public markets will be closely watched not only by investors, but also by the exercise tech companies treading its wake, including Tonal and Mirror. We’ve yet to receive any kind of strong indication that Peloton’s early success is repeatedly, but its IPO debut could tell us which way the wind blows for this as an exit path for the rest of the crowd.