With a market capitalization of $31 billion, Peloton (NASDAQ:PTON) has experienced a meteoric rise during a turbulent year for much of the economy. The fitness company's revenue nearly doubled in its fiscal 2020, which ended June 30.

Peloton ended the fiscal year with 1.4 million total paid subscribers, and CEO John Foley thinks this number can go way higher. Indeed, at Peloton's first investor and analyst day as a public company, which was held virtually, he said he believes attaining 100 million subscribers is a real possibility.

Looking at the company's impressive results thus far, it would be hard to blame investors for buying into the hype. But that's a lofty objective, and it will be difficult to achieve for three key reasons.

road showing future years

Image Source: Getty Images.

1. The pandemic won't last forever

The coronavirus pandemic has been especially beneficial to Peloton. Sales skyrocketed 172% in the three-month period that ended June 30 and the company turned a profit. With gyms compelled to close and hundreds of millions of people largely staying at home, finding good socially-distanced workout options became a priority for many. It was a perfect environment for Peloton's connected exercise bikes and treadmills.

Fitness clubs are now mostly back open, and some gym-goers are slowly getting comfortable visiting them again. While a COVID-19 vaccine might not be approved and become widely available until sometime in 2021, I think the general public for the most part will go back to their old routines once this happens. Exercising at home can't replace the full array of options that come with a traditional gym membership, so Peloton won't maintain its recent rate of growth once the pandemic-related tailwind abates.

2. You can't ignore the competition in at-home fitness

The Peloton Bike -- its cheapest piece of equipment -- sells for $1,895. That's higher than other stationary bicycles on the market today. Despite the myriad options available to those looking to bolster their at-home fitness routines, Peloton differentiated itself from the competition on the strength of its superb user experience. This is obvious when one looks at the strikingly beautiful 22-inch touchscreens on its bikes and treadmills, which provide access to an unrivaled catalog of workouts from some of the best instructors in the world.

Peloton offers superior products, but their high price tags create an opportunity for others in the space to make inroads at the lower end of the market. While Echelon's announcement of a new $500 stationary bike has been put on hold due to miscommunication with selling partner Amazon, it is possible that veteran companies in the industry like Nautilus and NordicTrack will attempt to build more affordable versions of Peloton's products that are only minimally lower in quality.

Then there is competition from alternative home-workout equipment upstarts like Tonal and Lululemon's Mirror. Peloton would probably be able to reach 100 million subscribers if its digital-only offering, which currently has over 300,000 paid subscribers, becomes a much more meaningful part of its business. While this is possible, it eliminates the importance of Peloton's most significant differentiator -- its equipment. Purchasing equipment drives customer stickiness, something not possible with a digital subscription. Additionally, there are already a plethora of free workout videos available online.

3. Scaling the business will be challenging

I pointed out in an article about Peloton's unit economics that what makes this company special is its ability to capture a massive amount of customer value quickly by selling expensive equipment. This characteristic has one significant drawback in that it makes it much more difficult for Peloton to achieve economies of scale. Peloton's ability to deliver larger amounts of equipment without any delay will be key for its ambitions and has the potential to drive down costs to consumers.

The company has experienced wild success because its first customers found Peloton was able to perfectly meet their specific needs. As that early target demographic becomes saturated, trying to attract new buyers who need more convincing may result in higher customer acquisition costs. That said, Peloton's fanatical customer base may be able to drive sales simply by word of mouth, thus expanding the potential pool of buyers for free. 

If this really were a winner-take-all market, Peloton would not sell any physical products and would have zero marginal costs to serve users with a digital-only offering. By contrast, designing, manufacturing, delivering, and installing high-end fitness equipment requires more capital as the company grows to greater size. On balance, these constraints, along with the current steep prices for its products, limit Peloton's addressable market.

Temper your expectations

Anytime a CEO or founder suggests that his or her company can grow by a monumental amount, investors would be well advised to do their own analysis of how realistic that goal is. The idea that Peloton could hit 100 million subscribers is audacious given that the pandemic will not last forever, competition will intensify, and reaching scale will prove difficult.

When expectations outpace common sense, investors should hit the brakes. I think Peloton is a great business, but its utopian outlook has produced an expensive stock that is priced for perfection. Can this company eventually reach 100 million subscribers? The future of fitness will tell.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.