A Deep Look at Peleton Before Its IPO

Peleton has signaled that it's going public, but it's doing so in such a way that it doesn't have to release all of its numbers. The connected fitness company says it's profitable and that it plans to use the money it raises to fend off competition. Peleton sells bikes and treadmills with which users can pay a monthly fee to access live and taped workouts. It's a growing model that many established fitness equipment companies are moving into. So far it has a very high retention rate, with most of its buyers remaining members for $39 a month.

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This video was recorded on July 16, 2019.

Dylan Lewis: On today's show, we want to talk about a company that will be going public at some point soon. We do not have a public filing for this business. That is Peloton. They have filed confidentially with the SEC, so there's some intent here to go public. We don't have a ton of specifics because we don't have the filing yet. But this was such an interesting story and it tapped into such a big trend that you and I have both been following for quite some time that we wanted to discuss it, Dan.

Dan Kline: Yeah. It's really interesting that this is a company that would seem to be one of these huge investments, you're going to look at the numbers and find out they're losing all sorts of money in attaining customers. The reality is, they say they're profitable. They're raising money to fend off competition, not because they need the money. And they've created a business model that we're just starting to see others latch onto.

Lewis: Yeah, it's kind of a new idea. For the people that are not familiar, Peloton is probably best known for their stationary bike product. They also have a treadmill product, and they're working on a digital offering as well. But their basic product offering is, they have a package. The low-level one runs about $2,200 for their stationary bike. That gets you the hardware, and then you have membership payments of $39 a month. The treadmill costs about $4,300 and has a same membership model. The idea here is, you have this fitness equipment that you can put in your home, or perhaps in a shared space like a hotel, and then the membership payments get you access to this entire digital library of workouts.

Kline: Yeah. They've created a market that's now called connected fitness. What this does is, it brings some of the communal spirit of taking a spin class. When you go to a gym, there's some encouragement from the teacher, from seeing students around you. With Peloton, obviously, you can do taped classes, but you can also do live classes from their studios. And you're getting that interaction, and it makes it more communal. In theory, it makes you want to do it more than just the traditional exercise bike that's a very one-on-one experience.

Lewis: Yeah, they're trying to build that community and take advantage of the digital abilities that are out there. There are some that are likening it a little bit to the Netflix of fitness. We like using that type of catch-all so much, it's so tempting for us. They've decided to dive a little bit more into digital recently. They really started out with the stationary bikes back in 2014, and are now giving an all-digital product as well. It's a Peloton app. I think for about $20 a month, you can access their full library of workouts, so, if you have an iPad or something like that at home, you can have these curated and specific workouts targeting a lot of the stuff that you want to be working on.

Kline: It's worth noting that that's a very crowded space. There are a lot of workout apps. I actually in the gym today saw someone following along on their phone and doing an app. There's a lot of services for that. But with Peloton, their goal is, that's almost like an add-on. If you've already paid for the gym and their services, that's a way to use it when you're traveling, when you're not at your physical bike, because the negative of having your Peloton bike or treadmill is that it's not all that portable. You're probably not going to bring it with you on vacation.

Lewis: No, it is a fairly large piece of fitness equipment. I don't think anyone's bringing that to the beach house for the summer if they're only there for two weeks. It's the kind of thing that tends to stay in one spot in the house.

Kline: For any of you who are thinking, this doesn't look all that different from the exercise bike in your gym, except instead of the screen being a television, or maybe even something that shows you a little bit of terrain, or gives you some numbers on your workout, it's a live class where you can see the teacher, or a taped class where you can see the teacher.

Lewis: Yeah, it's definitely worth looking at some of the promotional videos to get a better sense of what this looks like, for anyone that has not attended a fitness class before or hasn't seen online. There is this jazz to it. There's this excitement to it, that I think is probably really motivating for people that are using Peloton devices.

Kline: Yeah. If you want to check one out, there's a pretty strong retail presence. We joked about this a little bit on Slack, but look around your area. Whichever one the nice mall is, the mall that has all the fancier stores, Peloton often has, they're kind of pop-up kiosks, but they're almost like pop-up exercise studios, where you could get one, you could try it out, you could get some of the excitement of how this would work. Forgetting the price and the competition, it is a pretty cool product.

Lewis: Let's dive into some of the numbers that we do have. Like I said, we're a little limited here because we don't have their financials yet. But we do know that since beginning selling bikes in 2014, the company has sold more than 400,000 bikes, and they have over 500,000 subscribers for its memberships. Based on some comments from management, we know they're profitable, seemingly, and that 2018 revenue was somewhere north of $700 million, which was up from about $400 million in 2017. Obviously, a lot of growth going on here, Dan.

Kline: There's one number that's absolutely huge to me: they say they've retained 96% of their customers. That tells me a couple of things. One, when you watch the commercials for this, it's the beautiful people, and their Peloton is always in some amazing places like a vista behind them. It seems to me that the early adopters of this would be people who are already pretty good about their fitness routine. If they can hold onto those people, as it gets down to, I don't want to say regular people, but people who are not as committed to fitness, who do this and see it as the miracle cure, I'm going to guess that retention rates are going to stay pretty high. Once you've invested $2,400 in buying the bike, it's hard to say, "I'm going to cancel my $39 subscription, which turns this bike into effectively a coat rack."

Lewis: Yeah, there has to be some element there of the sunk cost incentivizing you to be more active.

Kline: Yeah. And, $39. I'm actually very surprised the number was that low. I never looked into the cost before. When you look at your gym membership, if you cancel your gym membership, you might as well put on social media, "I've given up," while you're eating a tub of ice cream or squirting cookie dough directly into your mouth. You're going to get a little bit of that, like gym logic of, "I know I didn't use the Peloton last month, but I'm really going to use it every day next month." And that will work for them if they can continue to get the next level of people into the product. What I don't think they're going to do is, the replacement cycle on these is going to be very, very long. Bike technology does not change that much.