Peloton’s IPO To Test Subscription Model’s Fitness

The word “subscription” appears more than 200 times in the Peloton S-1, which was filed with the Securities and Exchange Commission on Monday (Aug. 26).

And it is clearly the subscription model that, proponents hope, will keep the company growing and spark enthusiasm for an initial public offering slated to fetch as much as $500 million — with a razor/razorblade business model proposition that will scale.

The bikes aren’t cheap. Look online and you’ll see they fetch $2,000 or so. The treadmills do, too; some of them are more than the bikes. The subscriptions cost roughly $20 or so a month, depending on where you look.

A dive into the filing shows the advantages and risks tied to a hardware/software model that depends on, well, user motivation to keep both revenue streams (and margins) buoyant.

Is it all enough to support a valuation that is (at least at the last capital raise) in the billions of dollars?

The company has said it produces hundreds of videos a month — in essence Peloton acts as much as a content producer as it does a fitness equipment specialist.

Many investors parse S-1s for details on stock offerings and for some historical view of financials. The documents generally also are a good place to see how a firm thinks about its chosen markets and the risks therein, and why it chooses certain business models over others.

Scale seems to be in the offing.

In estimating its total addressable market (TAM) in the United States, the United Kingdom and Germany (in winter of this year), Peloton said it calculates 75 million people used treadmills and 27 million people used stationary bikes in the 12 months that ended in March of this year.

But beyond those general usage stats on equipment overlap, the company takes note that 174 million worldwide belonged to gyms, and it sees a TAM of 67 million households, with 45 million of them in the United States.

“Within our TAM, we estimate that 52 million households are interested in learning more about our connected fitness products without seeing the price,” the company stated.

The serviceable addressable market, said the company, where Peloton plies its trade with current offerings and price points, stands at 14 million households, and with 577,000 products sold into that market, there is 4 percent penetration.

Membership Data

In the latest figures, Peloton has said it has more than 1.4 million members, logging more than 58 million workouts across its offerings in the latest fiscal year that ended in June 2019. As for the demographics being targeted by the company — the profile growing most quickly belongs to the consumers “under 35 years old and those with household incomes under $75,000.”

The company said that in reference to those signed onto classes, on to the content part of the equation, its “connected fitness subscribers” grew to 511,202 in the latest year, which is up markedly from the slightly more than 35,100 subscribers seen in 2016.

It is the subscription model, and in particular the connected subscriber, that seems to bear mention on every (virtual) page of the S-1 filing.

To get that traction, however, the company has had to spend heavily — and the barriers to entry are limited ones (as we note, other firms such as SoulCycle also sell bikes for the home).

The language is perhaps boilerplate, but Peloton said in the filing: “We have incurred operating losses in the past, expect to incur operating losses in the future, and may not achieve or maintain profitability in the future.”

As has been seen with other, rapidly growing firms (say, ride-hailing companies) that have filed to go, or have gone, public in recent months, the net losses have been significant. While sales grew at triple-digit percentage rates, so did the net loss, which swelled to $195.6 million as compared to the $47.9 million net loss in the previous year.

A fair chunk of that has been tied to marketing expense. Sales and marketing expenses were $324 million in the most recent fiscal year, up from $151.4 million in the previous year.

Peloton is telegraphing its intent to keep spending into a nascent market. As the company explains in its filing, the fitness and wellness market is “saturated,” while the connected fitness and wellness market is still in its early stages. The latter is a space where connected devices are the name of the game, and the idea seems to be that the connected device is a content delivery system.

Workouts Per User

For those who would state that Peloton is at risk for the usual malaise that plagues would-be-fitness enthusiasts — that the treadmills and bikes will gather dust in the corner — the workout count per user is increasing too.

The S-1 revealed that in the most recent fiscal year, the subscribers worked out an average 11.5 times per month, up from the 7.5 monthly workouts recorded in the fiscal year that ended in 2017. The more workouts, perhaps, the more subscriptions stay sticky?

Language in the filing showed that there is some staying power with the model. As the company said in the S-1, 92 percent of all the interactive fitness equipment sold, spanning bikes, etc., “still had an active connected fitness subscription attached as of June 30th, 2019.”

All of this drove sales in 2019 (again, the fiscal year) to a top line of $915 million, which represents growth of more than 110 percent year on year.

Breaking down the revenues, the hardware represented the bulk of sales at $719 million in the 2019 fiscal year versus $348.6 million in the previous year, while subscription revenues were $181 million and $80.3 million, respectively.

Those subscriptions, the company has said, span $19.49 per month for Peloton Digital, which lets users access classes across various devices, to $39 a month for the Connected Fitness option, which includes multiple members in a household.

The Connected Fitness subscriber base alone, the company said, grew by 108 percent in 2019. The company said that subscription gross margins stood at 42.7 percent in the latest period.

Time will tell if the razor/razorblade model, geared toward fitness, is truly cutting edge.