Despite Its IPO Success, Peloton Might Just Be a Fitness Fad

Peloton is growing at a blistering pace, but can it survive fitness competition?

For the most part, it’s been tough for recent unicorn IPOs. Just look at the offerings from companies like Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) and SmileDirectClub (NASDAQ:SDC). They have all sustained material losses for shareholders. Then again, Wall Street has been getting antsy with companies that do not have a clear path to profitability.

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Source: Sundry Photography / Shutterstock.com

But there is one notable unicorn that has been able to buck the trend: Peloton (NASDAQ:PTON). The maker of internet-connected workout equipment has seen its shares go from $29 to $31 for a gain of about 8%. True, this is not a big return. But hey, at least it’s not a grueling loss.

So then why has PTON stock held up? Well, even though the company continues to lose money, the amounts have been declining. During the latest quarter, the net loss saw a $4.8 million improvement.

But the company is also posting blistering growth. Again in Q3, the revenues soared by 103% to $228 million and the number of connected subscribers also more than doubled to 562,774.

The Peloton Puzzle

Now for many people, Peloton is kind of puzzling. Why do people want to shell out more than $2,000 for an exercise bike as well as a $40 monthly subscription?

Yes, it’s not for everyone. But according to Peloton’s own research, there are still quite a few people who would not blink in making a purchase. The estimate is that the addressable market opportunity is at 45 million households in the U.S. In other words, Peloton does look to be at the early stages.

A key to the success has been an effective branding strategy — which has included a mix of traditional, social media and influencer marketing — and a focus on product innovation. Consider the following:

As a result, Peloton has created much engagement and loyalty. Consider that the 12-month retention rate for subscriptions is 94%.

Should You Short Peloton Stock?

Peloton has certainly built a solid operation. But what about Peloton stock? Is it a buy?

Note that there are many skeptics. Look at Andrew Left, who operates Citron Research. A noted short-seller, he has recently slapped a $5 price target on the stock.

“The narrative from Citron Research, Left’s company, starts by comparing [Peloton’s] enterprise value per subscriber to other companies,” said Stephen Ciccone, the chair of the Department of Accounting and Finance at the Peter T. Paul College of Business and Economics. “Peloton’s is over $15,000, yet companies like Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX), Planet Fitness (NYSE:PLNT), and Fitbit (NYSE:FIT) are all under $1,000. Peloton has grown its revenues incredibly fast the past few years, which could justify a high enterprise value. However, I agree with Left that Peloton’s high enterprise value is quite concerning, and I don’t believe its future growth potential will live up to the $15,000 enterprise value per subscriber number.”

Bottom Line

It’s true that new IPOs can keep up hefty valuations. But Left also points out that competition will become another factor. After all, this is what happened to another once-hot consumer products company, GoPro (NASDAQ:GPRO). Low-priced entrants took an awful toll on the company.

And besides, there is always the risk that Peloton might be just another fad. “We’ve seen, for example, fitness activities and products such as hula hoops, aerobics, Thighmaster, Tae Bo, and Zumba hit peaks and then level off,” said Ciccone. “Cycling or spinning has been quite popular since the 1990s, but it is still potentially vulnerable to fitness trends.”

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.