Why Peloton's Future Is Looking Bright

What does the future hold for Peloton Interactive (PTON -0.97%) now that our world is starting to return to normal after the chaos caused by the pandemic? Motley Fool contributor Jon Quast recently tackled this issue by sharing his take with fellow contributor Jason Hall and Millionacres editor Deidre Woollard. This video clip comes from Motley Fool Backstage Pass and was recorded on Sept. 3. In it, Jon shares the various ways Peloton intends to grow its member base to 100 million.

Deidre Woollard: I think Jon is going to share some of the Peloton's future.

Jon Quast: I've just hit you with the big picture. Zoom out, what is the thesis here. Now we're going to really talk about what Peloton can be. We've really more talked about what Peloton is.

You mentioned you're worried about a saturation point. Can totally appreciate where you're coming from with that. Right now, Peloton has 5.9 million members. That's not how many subscriptions they have, because you can have multiple people on the same subscription, people in the same household, for example. 5.9 million members, that was up 90% over the last 12 months. Long term, Peloton doesn't think that they are anywhere near saturation. Long term, they're aiming for 100 million members.

Now, how are they going to get there? They have multiple strategies to get there. One of the things that's hitting the news a lot right now is the reduction in prices that they are putting with their stationary bike. They are reducing prices, and they're trying to make it more accessible. That is a low-margin product to begin with. Really the strategy here is go ahead and sacrifice a little bit more of that gross profit on the hardware so that you can get more people into the ecosystem, realizing that recurring high-margin subscription.

Another way that they plan to do this, they are relaunching their treadmill product, the Peloton Tread, here in North America and in Europe. In this product category, when you think about it, treadmills are a lot more popular than a stationary bike. Management here believes that the treadmill category is up to three times as big as the stationary-bike category. When you think about it, most of their revenue over the years -- and they just did over $4 billion over the last 12 months -- most of that is their bike. They're saying up to three times bigger is the treadmill market. This is a big optionality lever that they plan to pull.

One other thing that I want to draw your attention to, Jason, is some acquisitions that they've made recently that may signal where they're going long term as a company, that is going to bring in more members. They've made three acquisitions recently. One called Otari, one called Aiqudo -- I don't know how to pronounce it -- and one called Atlas Wearables.

The Otari is kind of a failed start-up. It was a yoga mat with a camera on it that would analyze your yoga position on the mat and shout corrective instructions to you. If you're not quite holding the yoga pose correctly, this thing could automatically detect that and share what you needed to be doing to correct your yoga form.

The Aiqudo product, this is kind of like Amazon Alexa. It is a voice-assistant platform. And then the Atlas wearables, this is telemetrics. This can measure your heart rate, things like that.

Really to me, this signals that Peloton plans to get a connected-fitness yoga product on the market. It really seems like they can go with almost a connected-running product in a way. Really when you think about are there ways that this technology can be applied to existing products to make them even more innovative and more immune to disruption? I really think that there is. Imagine you riding on a Peloton bike and it's able to analyze how much effort that you are putting in based on what your heart rate is on the wearable. Or maybe the camera can analyze facial things through artificial intelligence. Who knows, the sky is the limit here.

But I really think that they are going to be a step ahead of the competition with innovation, and I really think that they're going to be able to pull in a lot of new members. If not 100 million, what does this company look like if they're even half right, with 50 million? That's almost nine times what they are right now. I think there's a lot of upside here.

Jason Hall: All right. This is getting interesting.

Woollard: It does sound like those acquisitions are a little similar to something maybe called Mirror, which Lululemon already has. But we've got a question from Dustin who says that "I've heard Peloton's moat is their instructors, meaning instructors are the main reason people won't leave Peloton for competing products." Do you think that's still the case?

Quast: I don't know if I have an opinion on that. It certainly seems that is a strength of Peloton's. There's other companies out there. I'm just being transparent and thinking out loud here. It seems like there will be good instructors at other connected-fitness offerings. But I have heard that argument as well, that people wind up gravitating toward their favorite instructor and would be really hesitant to leave that. I could see it both ways personally.

Hall: I think it's part of it. This is actually one of the things that makes this such an interesting business for me to own is the, not only is it, maybe I don't know how durable of a competitive advantage it is, but it adds to the stickiness. But it also kind of adds to the scalability of their model because the bottom line is that you can add more viewers to that same class and you don't have to add a bunch more instructors. So there is operating leverage benefit of even having those live instructors that people show up to be in their class for. I think it is a stickiness aspect. I really do.