Peloton’s initial public offering (IPO) should’ve been a massive success story. Founded in 2012, the company has established itself as one of the biggest names in the connected fitness world. Moreover, the firm generated $915 million in the last fiscal year. However, once Wall Street got a look at the company’s financials, the hype surrounding the startup evaporated.
On Wednesday, Peloton sold 40 million shares at $29 apiece. The next day, Peloton’s stock traded for the first time and its value fell by 11 percent. The $7.2 billion corporation’s precipitous decline shocked entertainment conglomerate Endeavor so badly that it withdrew its own IPO.
According to Bloomberg, the company experienced the third-worst trading debut for a billion-dollar IPO startup in the last decade.
What Went Wrong?
Like many startups that have quickly fallen from grace, Peloton’s rapid descent was caused by a few different factors.
Once investors recovered from the sugar rush of the company’s IPO, they realized that the firm has a profitability problem. Though Peleton generated almost a billion dollars in revenue in the last fiscal year, it also posted a net loss of $195 million. Moreover, the company lost $47.9 million in fiscal year 2018 and $71.1 million in fiscal 2017.
Peloton’s CFO Jill Woodworth addressed the issue by saying that her company is more focused on growth than profitability at this point in time. However, the firm hasn’t been exceptional at that part of its business either. In the seven years since it opened up shop, Peleton has placed just over half a million online-enabled exercise bikes and treadmills in homes. So, while the firm boasts a member count of 1.4 million, that number is somewhat misleading.
It’s worth noting that the 1.4 million individuals watching the company’s streaming exercise classes may be made up of multiple users linked to a single account. As such, only 613,000 people pay a minimum of $19.49 a month to access the corporation’s training videos.
Peloton’s financial losses have also been driven by its desire to expand its customer base. In fiscal year 2017, the firm spent $86 million promoting its products and services to consumers in the U.S., U.K., and Canada. Last year, it spent $151.4 million on sales and marketing and more than doubled that figure to spend $324 million this year.
Presently, the startup’s marketing capital expenditure is bringing in a woeful return on investment. One business expert told Bloomberg that the company isn’t likely to justify its valuation anytime soon. New York University’s Stern School of Business Professor Aswath Damodaran told the publication that the firm would need to convert half of America’s gym-goers to members to live up to investor expectations.
It’s Not All Bad
While things are grim for Peloton now, the company’s strengths suggest that it could become a profit-generating enterprise in the future.
On the bright side, the corporation has an extremely loyal customer base. Peloton has reported that 92 percent of consumers who bought its equipment still subscribe to the accompanying streaming service. Moreover, the fitness company has a minuscule churn rate. This year, only 0.65 percent of its members canceled their video training service. In fact, the service’s cancellation rate has been less than one percent for the last three years.
Another one of Peloton’s positive qualities is that it has decent margins on its core business. The company boasts a gross margin of 43 percent for its hardware and streaming segments. Comparatively, Apple has a gross margin of 35 percent on its hardware and 61 percent on its services.
Provided that Peloton can keep improving its outreach efforts, slash its marketing costs, and increase its streaming margins, the company can likely become very profitable. However, it will need to abandon its super startup image to get there.