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Why Is Everyone Talking About Peloton Stock?

By James Brumley – Aug 20, 2020 at 8:15AM

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The company has become the premier name where technology and exercise equipment intersect.

Most consumers have probably heard of the fitness equipment brand Peloton Interactive (PTON 0.80%). Its television commercials were already airing regularly before the coronavirus pandemic, but the crisis has prompted a surge in purchases of the company's at-home exercise machines. People are enthusiastic about their new "toys," particularly when lockdowns provide them with lots of free time.

Many investors may not realize, however, that Peloton has also recently become a publicly traded outfit. The company IPO'd in September of last year, and Peloton stock has since more than doubled its IPO price. The market seems to think the new normal in a post-COVID world is steering clear of gyms and using fitness equipment at home instead. A recent Freeletics survey suggested that around two-thirds of U.S. consumers don't think they need a gym anymore to remain fit, and 60% of them plan on canceling their gym memberships soon. For many people, a home gym is just as effective. Besides, Peloton's equipment brings a virtual, interactive gym experience to the home.

It's just too bad copycats are already taking aim at the company's idea.

A crowd of talking people

Image source: Getty Images.

Peloton raises the bar

Peloton's exercise bikes and treadmills aren't cheap. Retailing for more than $2,000 and $4,000, respectively, they simply aren't accessible to everyone.

But for consumers willing and able to invest big money in their personal fitness, Peloton offers something fresh: a digital screen built into both pieces of equipment, bringing a gym-like experience to a workout session, complete with a live trainer and a look at how all the other subscribers participating in that session are doing. On-demand workouts are an option too. Peloton even offers its exercise apps to individuals who don't own one of its bikes or treadmills.

The idea addresses one of the biggest hurdles that stands in the way of people getting and staying in shape -- a community (or lack thereof) of fellow fitness enthusiasts. It's also a recurring revenue opportunity, and a good one. Of last quarter's $524.6 million in revenue, $98.2 million came from subscriptions to Peloton's workout apps. The company ended the third quarter with 886,100 so-called "Connected Fitness" subscribers, but it forecasts that figure will be closer to 1.05 million for the full fiscal year to be reported early next month.

Peloton's subscribers love what they're getting, too. The third quarter's churn rate, or the number of subscribers who discontinued their access but were replaced by newcomers, was a modest 0.46% of the user base. Profit margins on this digital service are also higher than they are for Peloton's hardware.

This model helps reveal what the company has in store for its proverbial second act. The maximum number of consumers willing to shell out more than $2,000 for an exercise bike and $4,000 for a treadmill will eventually peak. But this crowd isn't likely to balk at regularly spending anywhere from $13 to $40 every month to make the most of their big investment. The company is also reportedly planning lower-cost workout equipment to capitalize on its name, including a cheaper treadmill and possibly a rowing machine, even though the value-oriented end of the fitness equipment spectrum is crowded and more competitive.

Unfortunately, lower-cost alternatives to Peloton's idea are already starting to gel.

Here come the copycats

Apple (AAPL -2.63%) is developing the most recent threat to Peloton's ecosystem, according to reports. Bloomberg noted last week that the tech company was working on a subscription-based workout app accessible via the iPhone, iPad, and Apple TV.

Apple's answer clearly doesn't include a bike or treadmill that integrates with a workout. But it's an alternative that could prove problematic for Peloton all the same, simply because there are well over 1 billion active iOS users. Most treadmills and exercise bikes now include a means of attaching a phone or tablet to enjoy a trainer-led workout. Another new app called "Ladder Teams" underscores just how easily an alternative can be brought to the market. Apple joins dozen of other apps that have been around for a while -- including treadmill apps -- but may not have been fully appreciated until Peloton priced its products.

Ditto for equipment, like NordicTrack's Studio Cycle line. The starting price point of $1,599 once seemed sky-high, even though it included access to a live, on-screen training experience and a variety of workout options. Compared to Peloton's $2,245 alternative, though, NordicTrack's hardware suddenly doesn't look so expensive.

And it's not just NordicTrack. The Bowflex C6 bike can connect owners with a handful of interactive workout apps at a lower price point. Ditto for ProForm's equipment, ranging from ellipticals to rowing machines to treadmills. In fact, much of ProForm's equipment is free to purchase for consumers willing to make a 3-year subscription commitment to its fitness app for $39 per month. It's a clever spin on packaging, pricing, and positioning the company's hardware.

The irony? Peloton is the name that pushed the idea of the app/equipment combo into the spotlight, giving consumers reason to take notice of cheaper options.

Putting it all together

Everyone is talking about Peloton stock because this company did what no other fitness equipment brand was willing or able to do -- bring high-end, at-home, interactive exercise equipment into the mainstream. Similar to Apple in the smartphone arena, Peloton isn't the biggest name in fitness equipment, but it's the premier brand everyone else wants to mimic.

Unlike Apple, though, Peloton probably can't count on repeat purchases of its hardware every couple of years. Eventually, the app will become the company's biggest profit and growth engine, but it remains to be seen if that will be enough given consumers' numerous alternatives.

There's certainly no denying Peloton deserves the buzz it created this year, even if it's the coronavirus that nudged it into the spotlight.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Peloton Interactive. The Motley Fool has a disclosure policy.

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