At-home fitness company Peloton Interactive (NASDAQ:PTON) recently made waves by announcing a new approach to its product lineup. The company will offer two product tiers in both its stationary bicycle and treadmill categories. The move was celebrated by investors because of what it does for its addressable market. With lower price points, particularly with the Peloton Tread, more consumers could become members.

But the tiered-pricing model overshadowed a game-changing move by the company: It will now offer financing for its connected-hardware products. This news is material to shareholders for two reasons.

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1. It reduces risk

In analyzing the risks to Peloton's business, a big one is the company's reliance on third-party credit providers. According to the company, the majority of its customers don't pay cash; they finance their hardware purchases. That's fine when the economy is booming. But in a recession, it could get harder for consumers to find the credit they need to become Peloton customers.

This risk whacked fitness equipment maker Nautilus during the 2008-09 Great Recession. Demand for the company's Bowflex products didn't so much decrease as much as people didn't have access to credit. Peloton had the same exposure to this risk as Nautilus, and it's one reason I didn't previously label Peloton as a recession-proof stock.

But things are different now. The company will offer financing on its connected-fitness hardware. The lower-tier Peloton Bike will be the cheapest product financing deal at $49 per month for 39 months. The higher-tier Peloton Tread+ will be the most expensive product with financing at $111 per month for 39 months. This doesn't include the ongoing All-Access Membership fee of $39 per month.

To be clear, the true risk for Peloton was its reliance on third parties, which is decreasing. But providing financing does present a new risk: It will need to be cautious when providing credit. If the recession worsens and unemployment rises, Peloton could see a lot of customers falling behind on payments.

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2. What about revenue recognition?

Right now, Peloton recognizes revenue on connected-fitness hardware products when they're delivered to the customer. Before delivery, customer payments and deposits are recorded as deferred revenue -- a liability on the balance sheet. Currently, this line item is listed as a $364 million liability, and we know at least some of it comes from being behind on Peloton Bike deliveries. Management says the current Bike backlog is $230 million. 

However, Peloton immediately recognizes revenue for delivered hardware even if customers are still making payments to third parties. While management has yet to comment on this, it's doubtful that would be the case for purchases financed by Peloton. For example, a Peloton warranty is paid upfront, but the revenue is recognized over the life of the warranty.

Its revenue from financed hardware could be recognized over the course of 39 months, instead of one payment upfront. The net result is the same. But it could be confusing for investors at a casual glance. If enough customers finance through the company, it's possible to see hardware sales go up but revenue go down. 

To be clear, Peloton is guiding for $3.5 billion to $3.7 billion in total revenue for its fiscal 2021 (the next four quarters). That's 96% growth at the midpoint and comparable to the 90% growth in connected-fitness subscribers the company is also guiding for. So, according to this guidance, it doesn't appear like the company is planning on changing up revenue recognition.

Peloton is hosting an investor and analyst session on Tuesday, Sept. 15, so I would expect this accounting detail to be addressed then. But at the very least, this financing move will affect cash flow. And I think it's likely a significant portion of Peloton customers will take Peloton's financing. The terms are attractive at 0% APR. 

A person does an exercise with two barbells while watching Peloton video content.

Image source: Peloton.

Conclusion

Financing is a game-changing move for Peloton because it lowers the risk associated with being reliant on third-party credit providers. I'd say the company is better set up to survive a recession now than before. It's also game-changing because it has the potential to seriously affect cash flow and revenue recognition. The impact on the financials could get confusing for investors. If revenue or cash flow drops significantly in the coming quarters, it will be important to go the extra mile and find out why. 

As long as connected-fitness hardware deliveries and customer retention (currently 92%) remain high, Peloton will likely remain a top growth stock.