Peloton’s IPO prospectus had some lofty ambitions: A potential market of 67 million households across the world, 14 million of which could very well be interested in splashing a few grand on one of Pelton’s high-end, cutting-edge exercise bikes… and the $40-a-month recurring subscription fee.
Poorer households didn’t need to miss out; For $20 you could get a stripped down Digital subscription and use your own gear, while Peloton could net higher margins and higher sales volumes.
It was a business model of scale that public market investors and venture capitalists agreed was a good one, and the IPO went objectively well, raising US$1.2bn through selling 40 million shares at US$29 (the top end of its price range), thus valuing the company at over US$8.1bn, excluding options.
Jump forward to today and things don’t look so good anymore for Peloton.
Circulated in an employee memo on Friday August 12, the latest “revamp” shall we say, will see the company shed 800 jobs in conjunction with the closure of warehouses and retail stores across North America.
Third-party providers will also be brought in to reduce per-product delivery costs by up to 50%, while prices are set to increase by up to US$800 in the US and £900 in the UK to shore up cash flow.
Though the news preempted a brief rally, Peloton’s market valuation has effectively halved since the September 2019 IPO, with NASDAQ-listed PTON shares falling by 90% in the past 12 months alone.
Who shoved the stick in the spokes?
Mixed blessings
Not everyone was dazzled by Peloton in the run up to its IPO.
Aswath Damodaran, valuation guru at New York University's Stern School of Business, sounded warning bells during a CNBC interview, suggesting that US$18-$19 per share was a reasonable valuation.
Damodaran insisted that the focus on a business model mainly preoccupied with scaling its customer base without stronger fundamentals was misguided.
Of course neither the sceptics nor Peloton saw what was coming in 2020: The Covid-19 pandemic swept the globe, closing gyms and forcing lockdowns on the unsuspecting public.
Devastating news for the billions affected; an absolute boon for Peloton sales.
High-margin Digital subscriptions were growing by up to 470% by the end of 2020, while lower margin, higher revenue Connected subscriptions were rising by up to 130% quarter-over-quarter.
As a result, Peloton’s market valuation skyrocketed to over US$45bln.
But no matter how many subscribers Peloton added during the pandemic, it doesn’t change the fact that in the last quarter, the company suffered the better part of a billion dollars in net losses and to date, the company has yet to turn a yearly profit.
There’s a sense that the pandemic was something of a mixed blessing for Peloton.
Catching up with Proactive, Damodaran reflected: “I do think that the COVID gift which Peloton got in 2020, of increased sales and subscriptions as gyms closed down, was one that they probably wish that they had not, because that growth not only covered up the weaknesses of their base business model (a US$2500 exercise bike puts you in niche business territory) but also made them overreach.”
That said, this is not an issue specific to Peloton.
“In fact, I would put Peloton, Zoom and Instacart in a grouping of COVID darlings that found out that what COVID gives is not permanent,” added Damodaran.
Tipping the scales
Reflecting on Pelton’s contention that 14 million households would be happy to splash US$2,500 on a bike that doesn’t take you anywhere, and $40 a month thereafter, one wonders if Peloton’s problem arose from ridiculously high valuations in the first place.
But according to Damodaran, it’s not just Peloton at fault.
“Putting scaling over building a business model is a problem that is not unique to Peloton, and to blame it for a practice that VCs (venture capitalists) encouraged and public market investors priced highly is a little unfair,” he said.
Perhaps the recent price hike on Peloton bikes will go some way to widening the company’s thinning margins, but just as sales guidance and workforces are being cut, so too should Peloton’s own expectations.
Though according to chief executive officer Barry McCarthy (who joined in February on a platform of stabilising cash flows): “My goal for Peloton is to become a global connected fitness platform with 100 million members.
“That’s equivalent to roughly half the world’s global gym memberships.”
Well, we’ll see about that.
But in fairness, news that Peloton is actually hiring in its software division despite sacking retail and warehouse staff suggests that the company is facing up to the fact that not many people want to spend a few grand on an exercise bike.
“A business model which relies on sales of (even more) highly priced pieces of kit which take you nowhere, while charging you a monthly fee to get shouted at by a ‘virtual’ trainer, may have had its day,” suggested David Morrison, senior market analyst at Trade Nation
Even if Peloton increases sales and gets rid of inventory overhang, Morrison contended that heading back above IPO valuations would more or less require another global lockdown, “and that’s just too much to ask for”.