Peloton Interactive (PTON +6.51%) has wasted no time in leveraging new CEO Barry McCarthy's background working in leadership roles at Spotify Technology and Netflix. Peloton recently began testing a new pricing system in Texas, Florida, Minnesota, and Denver, where customers simply pay a monthly fee between $60 and $100 for workout equipment and access to Peloton's workout classes.
It's part of the company's mission to make its equipment as affordable as possible. But the new pricing plan raises questions about Peloton's competitive position in the marketplace.
Image source: Peloton Interactive.
It's getting difficult to find growth
Peloton's business has scaled very quickly over the last three years, with connected fitness subscribers quadrupling to 2.77 million. But over the last year, revenue growth has decelerated from a rate of 128% in the fiscal second quarter of 2021 to just 6% in fiscal Q2 2022. Slowing growth in revenue and subscribers has caused management to tinker with its pricing strategy.
The new subscription plan reveals a company struggling to find ways to reignite growth. It highlights the one obstacle to driving growth, which is the cost of ownership. At $1,495, Peloton's entry-level Bike is not cheap. Plus, the asking price doesn't count the $39-per-month fee to access workout classes.
In fairness, the new pricing plan is part of Peloton's long-term strategy to lower the cost of ownership and expand the addressable market. Last year, it reduced the price of its flagship Bike model. However, it was a bad time to cut the selling price when subscriber interest was peaking. The reduced selling price, along with a plateau in subscriber interest, contributed to the deceleration in revenue.
Peloton is not alone. Recently, Lululemon Athletica offered its most loyal customers a free Mirror connected-fitness product in exchange for signing up for a one-year membership.
The high upfront cost to buy one of these connected-fitness products is not the only obstacle. Another problem for the customer is the space these products take up at home. Many people struggle with clearing out junk in their home, and a bulky piece of exercise equipment is one more thing to worry about. There are alternatives on the market, such as Nike's Training Club app and Apple's Fitness+ service, that offer at-home workouts with little or no equipment required.
Peloton didn't have trouble growing before the pandemic, but that was when the company was a fraction of its current size. The next 2 million subscribers will be much harder to win over in a crowded marketplace.
NASDAQ: PTON
Key Data Points
What does Peloton's future look like?
This leads to an issue that an analyst asked about on the fiscal 2022 second-quarter earnings call with management in February: Has Peloton's addressable market shrunk?
Peloton previously said its addressable market opportunity was 15 million households across the U.S., Canada, U.K., and Germany. While management doesn't believe its opportunity has changed, CFO Jill Woodworth acknowledged on the earnings call that "assessing growth coming out of COVID has been a significant challenge."
Moreover, it's difficult to know what Peloton's average profit margin will be over the long term, especially with management continuing to tinker with the pricing of its products.
What does Peloton's growth look like and how much profit can it make? These are basic questions investors need to research before investing in the stock. It's the reason I'm not ready to buy shares just yet, even at these lows.
