In its most recent fiscal quarter (ended Dec. 31), Peloton Interactive (PTON -2.59%) was able to increase revenue 6% year over year to over $1.1 billion, but it posted a net loss of $439 million. And over the last three fiscal quarters, the connected-fitness business lost more than $1.1 billion. It's no wonder that shares have cratered 77% in the past 12 months.
Saying that this consumer discretionary stock is going through hard times is an understatement. Demand for Peloton's high-priced equipment hasn't been as strong as management had hoped as economies reopened following lockdown measures during the pandemic. And actually making a profit, which should be the ultimate goal of any enterprise, seems unattainable anytime soon.
There is a possible strategy that might increase the chances that Peloton becomes profitable. Read on to find out more.
Peloton could become a fitness platform
With Peloton's current business model, it creates and owns the rights to the entire workout catalog, spanning classes in categories like cycling, running, strength, yoga, and boxing (among others). While this setup does generate a superb subscription gross margin of nearly 70%, it incurs high fixed costs to actually produce the classes ($108 million in the latest fiscal quarter).
Instead of developing all of its content in-house like it has been doing up to this point, what if Peloton opened up its top-notch software to third-party fitness trainers? There are tons of independent exercise instructors out there who might benefit from gaining access to Peloton's membership base of 6.6 million people. They could provide private training classes to Peloton's subscribers using Peloton's proprietary software.
Obviously, Peloton would need to make it worthwhile for independent trainers to want to be on its system. In addition to its massive existing user base, Peloton could facilitate class scheduling, payments, and discovery, all while taking a small cut of the transaction volume that happens. And the best part is that this incremental revenue would carry an extremely high margin, bringing Peloton's dream of becoming profitable closer to reality.
This scenario would make Peloton a true fitness platform that could attract more subscribers and more instructors in a virtuous cycle. Exercise enthusiasts would flock to Peloton to have access to an unlimited number of classes. And trainers looking to grow their small businesses would come to Peloton for its wide reach. Meanwhile, Peloton becomes the go-to fitness operating system, benefiting from the favorable economics that this strategy can provide.
According to the Bureau of Labor Statistics, there were more than 300,000 fitness trainers and instructors in the U.S. in 2020. And their median pay was roughly $40,000 per year. It's not hard to believe that many of them would gladly hop on Peloton's platform in order to boost their own prospects.
Peloton has a challenging road ahead
In the most recent shareholder letter, Peloton's management team indicated that the business will still be far from profitable this fiscal year, which ends on June 30. Having to deal with softening demand, as well as higher marketing expenses, creates a difficult situation to get the bottom line out of the red. Luckily, Peloton's new CEO, Barry McCarthy, has already shown a willingness to deploy an experimental, iterative, and data-driven strategy to turn things around.
To my knowledge, leadership hasn't mentioned anything about opening up Peloton's software to third-party instructors who could offer classes to subscribers. But it seems like a no-brainer decision to me.