Peloton is due to report its second-quarter earnings later today. Ahead of this, let’s figure out how exactly it makes money and if it will be a good long-term investment.
Peloton (NYSE: PTON) is one of those companies that seems to divide people no matter what.
Starting out as a fitness brand so popular it spawned its own organic communities, over the past few months the company has also been mocked for a lack of self-awareness in numerous long Twitter threads and, infamously, a much-maligned holiday commercial that was described by Vox as “the best horror movie in recent memory”.
Love putting my Peloton bike in the most striking area of my ultra-modern $3 million house— Clue Heywood (@ClueHeywood) January 28, 2019
In fact, that one advertisement lost the company some $1.5 billion in market value. Check it out for yourself.
But, behind the memes is a business that is currently valued at around $10 billion. Floated on the New York Stock Exchange back in September, Peloton reported revenues of $228 million in its first quarterly report as a public company back in early November.
So where does this money come from?
In its 10-Q report published on November 6, the company broke revenue out into three segments — ’Connected Fitness Products’, ‘Subscription;’, and ‘Other’.
Connected Fitness Products refers to the actual bikes and treadmills sold by the company to customers. The bikes are sold at a retail price of $2,245 and the treadmills come in at a much heftier $4,295.
These sales accounted for $157.6 million of the overall revenue mix in Q1 and represented growth of over 100% on the year previous. Discounting the cost of producing this hardware, Peloton was left with gross profits of $67.8 million on its connected fitness products and margins of 43%.
Management did note that this margin was hit by the addition of treadmills to the offering as well as investments in logistics, but it’s clear that, for the time being, hardware sales continue to be the big money-maker for Peloton.
The other main source of Peloton’s revenue comes from subscription fees to its platform — a flat fee of $39 per month.
Subscription revenue came in at a much smaller $67.2 million for quarter one. However, the company commands much better margins on its subscription revenue — 56.1%, or a 743 basis point improvement versus last year.
Subscription will be the key to Peloton’s future success considering its high-margin nature. Part of this will be getting more customers on to the Peloton platform and keeping them. The company saw its fitness subscribers grow by 103% to 562,774 in Q1, expanding its member base to over 1.6 million. The company expects to add close to another 900,000 subscribers by the end of 2020, which will be quite significant if it manages to hold on to its current 12-month retention rate of 94%.
Other revenue for Pelton primarily consists of the sale of Peloton-branded apparel. This came in at $3.3 million for Q1, representing 30% revenue growth
So is Peloton a good investment?
As is often the case with newly-listed companies, Peloton has had a turbulent time on the market so far. The stock is currently sitting about 12% higher than its $29 IPO price but has also fallen some 13% from its early-December highs thanks to that ad.
Despite its upper-class yuppie image that is often mocked, there is a lot to like about Peloton. Offering 0% financing on all of its hardware — plus the fact that the bikes and treadmills command great resale value — actually means that workouts with the company are surprisingly cheap when broken out over a period of 2 years or so.
Added to this is the ever-growing workout platform that the company is rapidly building. Similar to other platform companies like Facebook (NASDAQ: FB) and Netflix (NASDAQ: NFLX), first-mover advantage is incredibly important in creating a sticky platform. If Peloton plays its cards right, we could potentially see it emerging as the go-to brand for home fitness.
So is Peloton the Netflix of workouts? Let’s give it a few more quarters to see.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Peloton. Read our full disclosure policy here.