Even if you don't keep tabs on every up-and-coming company, you likely know of Peloton Interactive (PTON 3.44%) as the fitness equipment outfit that surged in popularity during the pandemic. Its exercise bikes, treadmills, and now its recently unveiled rowing machines are a top-of-the-line choice in each of their respective categories. The new rowing machine, for perspective, will retail for $3,195 when it finally becomes available for purchase.
What you may not realize, however, is that Peloton's goal isn't only to make fitness equipment. That's just a means to an end. The core business model here is generating recurring revenue from subscriptions to trainer-led workouts, both with its machines and the mobile app. To this end, the company was serving 6.9 million subscribers as of its fiscal 2022 fourth quarter, and those subscribers collectively paid Peloton $383.1 million during the period. Of that figure, $260.3 million was converted into gross profit, making up the entirety of the company's total gross profit.
And that's the crux of a key problem. While the impending debut of the company's "Row" machine is likely to spur another wave of subscriber signups, subscription growth was flat last quarter. This at least loosely suggests that a business model built around (very) high-end exercise equipment may not be one with a great deal of growth longevity.
Subscriptions are the real workhorse
The graphic below tells the tale rather plainly. The pandemic proved a boon for the company, prompting the purchase of fitness equipment by millions of people stuck at home. It also spurred subscriptions to Peloton's trainer-led workout services; even after the sale of its treadmills and exercise bikes peaked last year, the company continued to add a modest number of subscribers.
As the chart also shows us, though, the combination of a sales slowdown, higher costs, and logistics headaches has made the sale of its exercise equipment a decreasingly profitable venture. Gross profits on bikes and treadmills have turned negative for a couple of quarters now, in fact, offsetting profits on subscriptions.
Data source: Peloton Interactive. Note: Total members include both Connected Fitness and Peloton Digital subscribers. Chart by author.
That's only part of the troubling story here, however. The other half of the worry here is ... go back and take a closer look at the vertical bars representing the number of Connected Fitness subscribers and total members Peloton presently serves. Neither budged last quarter. The Connected Fitness subscriber headcount of 2.96 million was essentially flat from the previous quarter, while members overall slipped from 7.0 million to 6.9 million. To this end, subscription revenue and profits are also leveling off.
There's a handful of reasons for the slowdown of both of Peloton's profit centers. One of them is the slowing of the pandemic. Although COVID-19 is still spreading, people are decreasingly worried about it, choosing to resume their pre-pandemic routines -- including outdoor fitness activities.
Another reason also stems from the decline of the coronavirus contagion -- consumers are joining and rejoining gyms. The International Health, Racquet & Sportsclub Association reports that health club memberships in the important U.S. market recently reached a record-breaking 66.5 million people. Marketing consulting outfit Mspark says June's fitness foot traffic was 26.2% higher than it was three years ago, prior to the pandemic.
Then, there's the often unspoken reason: Most of us just aren't nearly as disciplined or committed to exercising as we like to think we are.
In its quarterly report published in August, Peloton conceded it again doesn't expect to see any meaningful sequential net subscription growth during the quarter currently underway.
Row isn't the much-needed gamechanger
That was before the company officially unveiled its new rowing machine, of course, which had been widely anticipated. Indeed, it was so widely anticipated that analysts were -- and still are -- calling for revenue growth of 13.3% in fiscal 2024 following the current year's likely 14.7% sales dip. Next year's top-line growth should also halve Peloton's projected per-share loss of $2.05 for the fiscal year that just began. High-margin subscription revenue and savings linked to the recent decision to outsource the manufacture of its equipment are factors the analyst community is considering.
That's still a pretty bold bet, though, in light of all the related trends we're seeing.
Sure, there's interest in the Row. Peloton will almost certainly see a sales bump because of its launch. By how much, though, and to whom? Demand for rowing machines pales in comparison to demand for treadmills and stationary bikes, and to the extent there is a market for interactive rowing machines, lower-cost alternatives to the $3,195 Row are readily available from brand names like NordicTrack and Echelon.
Are they copycats of Peloton's idea of making the exercise experience an immersive one? You bet. It just doesn't matter.
Their comparable trainer-led workout subscriptions are cheaper too, with the key differences between these competing offerings being tougher and tougher to spot.
Too risky a bet
Connect the dots here. It's tough to maintain subscription growth when demand for the underlying fitness equipment is waning. It's going to get even tougher going forward, despite the upcoming introduction of a new rowing machine.
It's a concern for Peloton shareholders simply because without any clarity regarding the plausible profitability of equipment sales -- or any real clarity as to future demand for it -- subscription-related profits were the only profit-growth engine investors could latch onto. Now, they can't even feel good about doing that.
Bet on Peloton Interactive if you must -- just know it's a high-risk investment.
