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Is Peloton Interactive Ready to Cycle Past Investors' Doubts?

By Rich Duprey - Jan 31, 2020 at 7:39AM

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The fitness equipment maker is growing quickly, but it's not all good news.

Connected exercise equipment maker Peloton Interactive (PTON -0.55%) is going to see whether Oscar Wilde's aphorism -- the only thing worse than being talked about is not being talked about -- is true. 

The high-end fitness company was mercilessly mocked for a commercial of an already fit woman getting one of its stationary bikes for Christmas and then chronicling how transformational it was to her life over the subsequent year of usage. While the outrage some expressed was excessive, the massive amount of media it generated for Peloton just ahead of the holidays was priceless.

As the fitness equipment company prepares to issue its fiscal second-quarter earnings report on Wednesday, Feb. 5, the question is whether such critiques actually drove sales higher. With questions about whether its business is sustainable and with new competition on the horizon, Peloton investors will want to know what's in store.

Woman riding a Peloton stationary bike

Image source: Peloton Interactive.

The high cost of fitness

Peloton fitness equipment is not for everyone. Its stationary bikes start at more than $2,200, and its treadmill goes for a sweat-inducing $4,300. That equipment is paired with its connected classes that start at $39 per month, though someone could just subscribe to the classes without buying its fitness equipment for less than $20 per month.

First-quarter revenue more than doubled to $228 million, so the holidays ought to have helped boost sales above last year's second-quarter effort of $263 million, with the commercial's brouhaha perhaps pushing them even higher.

Anecdotally, I was surprised by the number of Peloton delivery vans in my neighborhood during the holidays, but that could just have been from the heightened awareness of the company due to the controversy. I certainly haven't noticed any since.

Ahead of the pack

But Peloton does need to keep moving. While it has been steadily growing its connected fitness subscriber base -- now 560,000 strong as of the first quarter of fiscal 2020 -- the rate of growth is easing.

Subscribers more than doubled year over year, but the approximately 52,000 people it added from the prior quarter represents a slowing in the growth rate. But this could be a seasonal fluctuation. A year ago, it added 175% more subscribers to its rolls in the second quarter, or 85,000 more than it had in the first quarter, so investors should continue to track the company's subscriber additions.

Chart of Peloton quarterly subscriber additions

Data source: Peloton Interactive SEC filings. Chart by author.

Peloton is also seeing its customer churn rate grow, though it is still very low at just 0.9% in the first quarter, while its customer retention rate remains exceptionally high at 94%. Yet customer churn jumped from 0.5% last year, and while it had been declining from 0.7% in 2017 to 0.6% in 2019, it now seems to have reversed as Peloton brought in more customers ahead of going public.

The connected fitness leader also has to spend a lot of money to continuously acquire more customers. Sales and marketing expenses represented 34% of total sales in the first quarter, or $77.6 million, up 71% year over year.

To help bring in more customers, Peloton recently lowered the monthly cost for subscription-only customers from $20 to $12. Although that could help it make up in volume what it's losing on each subscription, some longtime customers were upset the company didn't offer a discount to owners of the company's exercise equipment as well.

Peloton is also reportedly looking to introduce some new, lower-cost equipment like a rowing machine.

Spinning its wheels

Investors should watch to see if those churn numbers grow as a result, but also the effect that growing competition might have.

SoulCycle owner Equinox recently secured financing to help it expand its own connected fitness digital platform, while Nautilus is building out its own platform, JRNY, that's currently available on one of its Bowflex machines but will be adapted for more of its equipment.

Peloton Interactive has been the market leader, though Wall Street is increasingly questioning how far and how fast it can grow. It's still generating losses that analysts forecast will come in at $0.32 per share in the second quarter, even as revenue hits an estimated $423 million.

Trading at over 8.5 times sales, Peloton is an expensive stock despite being down over 10% from its all-time high, suggesting investors might be better off standing on the sidelines to see which way its business will head.


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