The investing community hasn't exactly been kind to Peloton Interactive (NASDAQ:PTON) since its IPO on Sept. 26. Shares are now trading at more than 20% below their initial offering price, perhaps a surprising situation considering the company reported 110% revenue growth in its 2019 fiscal year (12 months ended June 30, 2019) ahead of the public debut. Investors still aren't biting after sales doubled again during the fiscal 2020 first quarter; shares fell nearly 8% after the report.

There's a good reason for this. The stock is still valued under the assumption that there will be huge upside for some time, and the first sign that momentum is slowing and losses are persisting was rife in Peloton's first report card as a public concern.

Commendable top-line numbers

But don't be too hard on Peloton. Let's give credit where credit is due. While some may scoff at a stationary bike and treadmill with price tags of $2,245 and $4,295, respectively (not to mention the monthly subscription to workout content on the app), someone out there is ponying up. Q1 2020 revenues for connected fitness products and subscriptions both doubled year over year again.

Metric

Three Months Ended Sept. 30, 2019

Three Months Ended Sept. 30, 2018

Change

Connected fitness product revenue

$158 million

$77.9 million

103%

Product gross profit margin

43%

45.8%

(2.8 pp)

Subscription revenue

$67.2 million

$31.7 million

112%

Subscription gross profit margin

56.1%

48.6%

7.5 pp

Pp = percentage point. Data source: Peloton Interactive.

Also good news: Gross profit on subscriptions got a big bump as memberships rose, likely due to the company launching a subscription workout service even for those without the Peloton bike or treadmill. Gross profit on equipment wasn't so great, though. To help, management announced the purchase of its manufacturing partner, Tonic Fitness Technology, for $47.4 million. Maybe controlling its supply chain will help the company become more profitable over time.

A Peloton bike featuring a big video screen attached to the top, in a living room.

The Peloton Bike. Image source: Peloton Interactive.

Red ink and decelerating results

And controlling costs could be a really good thing, because, in spite of the torrid Q1 growth, Peloton is still far from turning a profit. The bottom line did improve from the $54.5 million net loss a year ago but still ran at negative $49.8 million. The culprit is high operating expenses as the company continues to prioritize growth over profits.

Turning to the outlook, Peloton called for full-year 2020 revenues of $1.45 billion to $1.5 billion -- a 61% growth rate at the midpoint. Nothing wrong with that, but it does imply a sharp slowdown from what was just offered to shareholders in Q1. Losses are expected to continue mounting as well.

I'm going to go out on a limb here and say this: Peloton reminds me of Fitbit (NYSE:FIT). I know, wearables aren't anywhere close to comparable with workout equipment -- especially not of the premium variety like Peloton makes -- but hear me out. After a hot start post-IPO a few years ago, Fitbit investors had to come to terms with the fact that Fitbit's wearables were easy for competitors to copy. Sales growth stalled, and Fitbit has since been trying to figure out how to get in on the recurring-revenue game -- be it through healthcare or workout services, it just hasn't panned out as planned. Gym memberships have gotten cheap, and there are plenty of options out there, including going outside and getting exercise for free.

FIT Chart

Data by YCharts.

Peloton does tout the fact that it's a content creator with a fiercely loyal fan base. Maybe I'm totally wrong, and the workouts via subscription Peloton creates will be the next global sensation that will stick for the long term. But profitably monetizing that is easier said than done, and copycats have already emerged at cheaper price points. Besides, it's not as if Peloton itself is the first to the workout content party -- Nike, Fitbit and its new taskmaster Alphabet, or Apple, anyone? In the meantime, a company expected to do about $1.5 billion in revenue in the next year, all at a loss, and currently valued at $6.34 billion is not one I'm interested in betting on.