Apple (NASDAQ:AAPL) is reportedly working on some type of fitness-oriented service as part of its concurrent efforts to grow its services business while pushing deeper into fitness and digital health. Many details remain unclear, but the gist of it sounds similar to Peloton (NASDAQ:PTON) offerings: a subscription that provides access to a content library of virtual fitness classes.

Should Peloton be worried about competing with the largest tech company on Earth?

Woman in exercise clothes doing a workout in her living room by following along with one on the television

Image source: Peloton.

Apple's foray would have a "limited impact"

BofA Securities analyst Justin Post doesn't think so. In a research note issued to investors last week, Post reiterated a buy rating on Peloton shares alongside a price target of $72.

Peloton has two types of subscribers: Connected Fitness subscribers, who use the company's equipment; and Digital Membership subscribers, who do not. The latter group is theoretically more liable to switch to another service, as they haven't just spent $2,200 to $4,300 (or more) on a Bike or Tread that requires a $39-per-month subscription. Digital Memberships cost just $13 per month and don't require Peloton gear.

"We think Apple's new fitness app could compete vs. Peloton's digital only subscription offer (though we expect initial class selection and library to be inferior), but will have limited impact on Peloton's connected fitness base that uses Peloton's bike or a tread," the analyst wrote. "We note that Peloton's digital-only subscription revenue was only 1% of total revenue as of [the fiscal third quarter], with the biggest value of digital subscribers being potential conversion to connected fitness subscribers."

Peloton is posting strong growth for both categories of subscribers as consumers exercise from home during the pandemic.

Subscriber

Fiscal Q3

Growth (YOY)

Connected Fitness

886,100

94%

Digital Membership

176,600

64%

Data source: Peloton. YOY = year over year.

Much like Apple's recent forays into new service categories like video streaming, the initial content catalogs are not particularly robust. It takes a lot of time and money to produce content, and Peloton already offers thousands of on-demand classes in addition to live-streamed ones.

Implicitly acknowledging that Apple TV+ may not be very competitive, the Cupertino tech giant's initial strategy with the service has been to give away a free year of service bundled with certain hardware products, effectively buying it time to build out the catalog before users choose whether to renew for $5 per month.

It's unclear how Apple will pitch a fitness service or how much it will cost. Perhaps it could make sense to bundle it with Apple Watch, the company's most visible fitness product.

Peloton now has over 2.6 million total members, in part because Peloton briefly extended the app's free trial period from 30 days to 90 days earlier this year. That limited-time promotion resulted in over 1.1 million new members last quarter, and investors will want to know how many of those members are sticking around and paying when Peloton reports fiscal fourth-quarter results on Sept. 10.