Peloton Interactive (NASDAQ:PTON) just completed its initial public offering in September, and it already commands a market capitalization of over $8 billion. Investors are clearly putting a lot of faith in the company's future growth since it hasn't reported any profits yet.
That said, revenue is climbing fast, but what every growth investor wants to know is how much Peloton can really grow over time selling bikes and treadmills that cost more than $2,000. In other words, is this a stock that can make you rich? Let's find out.
A highly devoted customer base
Peloton has sold over half a million connected fitness products, including bikes and treadmills. The business model is simple: Sell the hardware and then get customers hooked on subscriptions to online fitness classes for $39 per month. Peloton earns a healthy gross profit selling both, but management is in aggressive growth mode. It's basically reinvesting all the gross profit earned on fitness products into marketing to grow the subscriber base, which is the main reason Peloton isn't reporting a profit yet.
Owning a Peloton product is expensive. The basic bike model costs $2,245, and the basic treadmill $4,295. The customer then has to pay more than $400 per year for a digital subscription, which allows users to stream fitness classes led by professional trainers on a small display connected to the equipment.
It's a lot of money, but we need to keep in mind who the target customer is. These are not products for someone who is just looking to lose some weight in a few months so they can let those "hidden" muscles finally have their day in the sun at the beach. These are lifestyle products. Peloton has sold over half a million fitness products already to people who work out regularly or are looking to make a drastic change to their daily routine.
Peloton estimates its total addressable market to be the 67 million households it believes are interested in subscription fitness and may purchase a Peloton product today or in the future. The company narrows that down further to 52 million who have expressed interest in learning more about its products without knowing the price beforehand.
Out of this potential market, the company believes there are as many as 14 million who would be interested in Peloton's current fitness products at current price points. Given that Peloton's revenue growth accelerated from 99% in fiscal 2018 to 110% in fiscal 2019 (which ended in June), it appears the company does indeed have a very sizable opportunity in front of it.
Favorable demographic trends
Societal trends are certainly working in Peloton's favor. One of the key demographics for these products is millennials. Studies show that younger generations are more interested in eating right and exercise than prior generations. That, along with the trend of more people working from home, means there is plenty of demand out there for at-home workout options.
Other companies are getting in on the action, too. The new start-up Mirror, which sells a $1,500 interactive display for in-home workouts, recently received a $34 million investment from a venture fund group that includes Lululemon Athletica. This is a sign that Peloton is tapping into a hot growth market.
A growing digital subscription platform
The thing is, Peloton is not necessarily dependent on selling pricey workout equipment. The company also offers a digital subscription through its app that lets you engage with fitness classes without owning a Peloton product. The app-based classes cost $20 per month, much less than the connected fitness option through the bike, and they offer options for running, walking, yoga, and other indoor workouts.
Revenue from subscriptions, including sales via the app, increased about 450% over the last two years through the end of fiscal 2019. That's much faster than sales of bikes and treadmills, which still increased nearly 300%.
|Segment||Fiscal 2019||Fiscal 2018||Fiscal 2017|
|Connected fitness products||$719.2 million||$348.6 million||$183.5 million|
|Subscriptions||$181.1 million||$80.3 million||$32.5 million|
|Other||$14.7 million||$6.2 million||$2.6 million|
|Total revenue||$915.0 million||$435.0 million||$218.6 million|
Currently, Peloton is mainly using the app as an engagement tool for owners of a connected fitness product. Additionally, the app serves as a tool to allow potential product buyers to try the fitness classes before committing to dropping thousands of dollars on a new bike or treadmill. But the company acknowledges that growth from the app as a stand-alone fitness subscription service could develop into its own growth opportunity over time.
Peloton is a lifestyle brand
It is wrong to categorize Peloton as only a seller of pricey exercise bikes and treadmills. That's the engine of sales right now, but the company defines its mission as having a much broader scope beyond making exercise equipment. As Peloton builds its brand through marketing and word of mouth, it is building a lifestyle brand that could be as strong as any athletic apparel company's.
Consider that Peloton's fastest-growing revenue category over the last few years has been not bikes or subscriptions but Peloton-branded apparel and accessories -- referred to as "other" revenue in the company's reporting. Revenue from these items has grown from just $2.6 million in fiscal 2017 to $14.7 million in fiscal 2019.
Now, what kind of profit margin the business can generate across equipment, subscriptions, and apparel over time is another topic. But Peloton definitely has plenty of momentum working in its favor right now. Given the current growth trajectory, the company has the potential to capture a sizable portion of its addressable market. If management can translate that into growing profits, the stock has the makings of a multibagger.