Peloton is missing the No. 1 characteristic necessary for a successful IPO: analyst

Brooke DiPalma
Associate Producer

Peloton, known for its at-home, internet workout classes, officially filed to go public Tuesday, with plans to list on the NASDAQ under the ticker PTON.

While Peloton more than doubled its sales in the past year, the fitness startup also reported widening losses and acknowledged in its filing that it “may not achieve or maintain profitability in the future.”

John Meyer of Starship Capital flagged this lack of profitability as a major issue for Peloton. The startup, which was valued at $4.15 billion last year after its latest funding round, is primarily known for its internet-connected stationary bikes but has since expanded to connected treadmills and other streaming workouts.

“If you’re a company that’s going to IPO in 2019 at this point, you need to have a few key metrics in place,” Meyer told Yahoo Finance’s The First Trade on Wednesday. “I think the No. 1 characteristic there is profitability. Peloton is still not profitable and not really, nowhere near profitable.”

A Peloton bicycle. Source: Getty Images

Peloton offers users the opportunity to connect with fellow riders across the globe in live, streamed workout classes; users can also take classes on-demand they view on screens attached to their bike or treadmill.

One problem for Peloton is the high price of that equipment, according to Meyer. A bike costs $2,245, in addition to a monthly subscription fee of $39. Peloton treadmills, introduced in late 2018, retail for $4,295, on top of the monthly subscription fee of $39.

However, well-to-do fitness fanatics seem to be willing to pay the price. It has a 12-month retention rate for its connected fitness subscribers, according to its S-1.

“Its churn rate is actually very low compared to the rest of the industry,” Meyer explains, “but if you look into the reason why it’s low is that these people are buying the very expensive training products and to use those products you actually are forced to sign up for the monthly subscription...unless you stop paying for the monthly subscription, your devices are actually rendered quite useless.”

Peloton shares its net revenue and net losses in its S-1 filing. (Courtesy: Yahoo Finance video)

Peloton’s losses have been widening, growing to $196 million for the 12 months ending in June compared to $48 million for the prior year. The startup is in good company, as most tech “unicorns” going public this year like Uber, Lyft, and WeWork have yet to make a profit.

Although Meyer may be skeptical of Peloton in particular, he says global expansion may be one of its “saving graces” if it comes to fruition.

In its S-1 filing, Peloton says it’s “in the early stages of growth in our existing markets.” In 2018, it expanded to the United Kingdom and Canada, in addition to its expansion into Germany in the winter of 2019.

“It has been untested considering over 90% of their sales are still just in the U.S., so I actually hope that we see some significant traction internationally,” Meyer said.

Peloton shares is subscriber growth over the course of 2017-2019 in its S-1 filing. (COURTESY: Yahoo Finance video)

‘A huge trend in the fitness industry’

Despite worries from Wall Street about the company, fitness fanatics are rallying behind Peloton.

“It’s such a huge trend in the fitness industry right now, whether you live in New York City or you’re elsewhere in the country” participants can join the classes, Abby Cuffey, Women’s Health Executive Editor told Yahoo Finance’s YFi AM, “the beauty of that — is the community that they’ve created.”

Each rider can create his or her own profile, invite friends into competitions and even link up to his or her Facebook (FB) account.

And although she admits the price tag does draw in people who “can afford it and who want access to this high-end fitness experience,” she emphasizes that the fitness company also offers a Peloton Digital app for a monthly membership rate of $19.49. It offers 15 live, daily fitness classes including and beyond cycling and running, with offerings like bootcamp, yoga, strength, and outdoor training.

But she acknowledges that the physical equipment provides a unique experience.

“The magic of it is when you’re on this bike and you’re on this treadmill, you are getting that experience,” Cuffey continues. “You can replicate it...but the power of the bike in pretty incredible.”

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