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Peloton IPO: what you need to know

Peloton, the company spearheading a new approach to fitness in the home, has filed for an initial public offering (IPO). We have a look at the business and the investment case.

Shares Source: Bloomberg

What is Peloton?

Peloton Interactive, founded in 2012, makes fitness equipment for the home and supplies complimentary training sessions to users over the web.

The company’s flagship product, the Peloton Bike, is a high-end indoor fitness cycle that allows users to experience studio spin classes in their home. They can participate in over 20 daily live classes over the internet or use thousands of on-demand classes that have been pre-recorded by its group of trainers. The company had sold over 400,000 Peloton Bikes as of February 2019.

It launched its second product Tread, an equally digitally-savvy treadmill, in late 2018 as it starts to broaden its appeal to time-constrained fitness buffs that would prefer to exercise in the comfort of their own home. Peloton has not revealed how many Treads it has sold so far, but it did say earlier this year that there had been an 'overwhelming early reception' since it was launched.

Peloton’s subscription model

Peloton makes fitness equipment but its business operates on a subscription model. Although the Peloton Bike costs around $2000, the company’s margin is thought to be slim to non-existent. Instead, money is made through the monthly subscription fee paid by its users to access its live and on-demand fitness classes.

In its home market of the US, users pay $39 per month to tap into over 20 live classes that are streamed to the bike’s attached touch screen every day and over 10,000 pre-recorded training sessions, all of varying intensity and length. In addition to the bespoke spin and running classes designed for the equipment, users can experience a broader at-home fitness regime by using complimentary training videos covering the likes of yoga and weight training.

The hardware and content are brought together by social tools and enhanced by gamification. A real-time leader board is displayed during classes to inject some friendly competitiveness and the ability to speak to instructors and other users has helped build a highly engaged social community. The company has over 25 instructors and its most successful boast over 200,000 followers.

Peloton has made a conscious effort to ensure the subscription is a necessity rather than an option. The touch screen becomes virtually useless without it. Only a very limited package of on-demand classes are available without a subscription and it doesn’t allow you to access third-party fitness classes or play external media through sites like YouTube. The leader board and social community are also ripped away if a user cancels their subscription. This approach means users are much more likely to maintain their subscription because without it, the pricier aspects of their fitness equipment becomes redundant.

With firm control over the equipment, the content and the technology that brings it together, it is clear that Peloton is keen to stay in charge of all aspects of its offering. Tom Cortese, Peloton’s chief operating officer (COO) and one of five co-founders, has said the company heavily discussed strategies and models implemented by companies like Apple, Netflix and Amazon, and the success they have had by focusing on 'user experience' rather than top-line sales.

Is Peloton too pricey?

The cost of Pelton’s products, twinned with marketing that only showed its bike installed in wealthy penthouses and zen gardens, has been criticised. It has led to assumptions, also partly fuelled by celebrity endorsements from the likes of Richard Branson, that Peloton is only for the rich and famous.

According to Wirecutter, part of the New York Times, the basic start-up costs for a Peloton bike in the US are:

  1. Peloton Bike - $1,995 excluding sales tax, which in New York adds a further $200.
  2. Delivery and installation fee - $250
  3. Subscription fee - $39 per month adds up to a $468 charge for the first year.

That means the first year of ownership will set you back $2700 in the US, excluding sales tax. And that is the minimum, with Peloton selling a range of non-essential but highly beneficial extras to help users get the most out of their equipment:

  1. Peloton cycling shoes - $125. Users can choose to use other cycling shoes. They can also swap them for a strap that allows them to cycle using generic trainers, but even that alteration will set you back $60.
  2. Bike mat - $60
  3. Pair of dumbbells - $25. These sit in a cradle at the back of the seat and are used in the supplementary weight training classes on offer.
  4. Heart-rate monitor - $5

The price does start to add up but claims that Peloton is a much more expensive option for those setting up a web-connected home gym are overdone.

The Peloton Bike is priced at the upper end of the market but it is not the most expensive piece of home-gym equipment on the market. Other digitally-savvy exercise bikes, such as that made by NordicTrack, carry the same price tag. Mirror, a monitor that can be used to stream exercise classes like yoga and Pilates and then disguised as an ordinary mirror when not in use, costs around $1500. Tonal, described as 'an entire gym' on your wall, is priced closer to $3000.

The same can be said for Tread. Although it is twice as expensive as the bike, costing nearly $4000, that still undercuts some others in the market. The Matrix T7xe treadmill, for example, is advertised at over £11,000 on some UK commercial websites. The company also allows people to utilise financing to overcome the initial cost, and has priced the monthly repayments in line with the average price of a gym membership.

The $39 monthly subscription fee is also in line with the wider market and competitive with traditional alternatives. Mirror and Fightcamp, a smart home-boxing setup for the home, both charge the same $39 to their subscribers while Tonal’s monthly fee is even higher. SoulCycle, one of Peloton’s main rivals that offers spin classes in studios rather than the streaming them to you in your home, can charge anywhere between $28 to $36 for a single class.

Plus, users only have to pay one subscription if they own both the Peloton Bike and Tread, which means Peloton becomes better value for money the more products you have.

Peloton has said it has tried to 'find different entry points into the Peloton system for different folks'. Although the company has built its offering around its equipment it does offer a subscription-only service, Peloton Digital, that gives users access to its classes and digital services through a phone or tablet without having to buy the equipment. This means Peloton can still target those that believe the equipment is too expensive, or those that are concerned about committing too much money to their exercise regime. This service is cheaper than its main offering at $26 per month, and allows people to use their own, probably cheaper equipment. There are a number of companies offering online exercise classes that Peloton must compete with, such as Sweat.

Peloton, as the market leader in the space, is widely regarded as a benchmark for the market. The company is currently in a legal battle with one of its other main rivals, Flywheel, which launched its own subscription service, Fly Anywhere, to beam spin classes into user’s homes in 2017. It has claimed Flywheel has created a 'copycat' of the Peloton Bike. Flywheel denies those allegations and, in response, has asked the US Patent & Trademark Office to review a number of Peloton’s patents, claiming they shouldn’t be seen are proprietary.

Although the cost of the equipment varies in each country (£1895 in the UK or €2290 in Germany), the monthly subscription service is the same regardless of currency, at £39 and €39, respectively.

Peloton expands beyond the US into Canada, UK and Germany

Peloton has around 70 physical locations spread across the US, Canada and the UK. This includes some where people can use Peloton equipment but in a studio environment. The company is currently building a 35,000 square foot flagship studio in Manhattan where it will offer studio classes, market the bike to potential customers and record and broadcast its classes. It has also said it will open a 20,000 square foot site in Covent Garden in the UK, representing its first flagship opening since expanding outside of the US.

In May 2019, Peloton announced it will be moving into Germany by the end of the year. It is the fourth country Peloton is expanding into, and the first where it will offer non-English language classes to users. The company says Germany is the biggest fitness market in Europe, with ten million people signed up to a gym. Bespoke content will be made in German (although recorded, produced and broadcast from London) while 'hundreds' of existing on-demand classes will be subtitled.

Peloton also targets commercial clients. For example, Peloton Bikes have been installed in a number of Marriott’s Westin Hotels & Resorts in the US following a partnership being formed in 2017.

Is Peloton profitable?

Peloton’s financial figures have not yet been disclosed but the company previously suggested it booked around $700 million in revenue in the financial year to the end of February 2019, up from $370 million the year before and just $60 million the year before that. Market research firm IBISWorld has suggested revenue in the current financial year could hit $999 million and suggests it could hold 6.2% of the US gym equipment market by the end of February 2019.

Peloton has previously said it was profitable – something of a rarity for a firm seeking to go public nowadays – but said it expected to book losses after investing in the production and marketing of Tread last year.

Peloton IPO valuation

Peloton has confidentially filed for an initial public offering IPO with the US Securities & Exchange Commission (SEC). This means it does not have to immediately publish a prospectus or its financial history. These will have to be released before the IPO is launched, but it could be a matter of days between the two. Numerous companies have taken this approach when listing over recent years, including Pinterest, WeWork and Uber.

Read more: 2019 IPOs sees Beyond Meat eclipse Uber and Lyft

We do know that Peloton’s last funding round was conducted in August 2018, when it raised $550 million to fuel the development and launch of Tread, its international expansion and marketing. That was led by venture capital firm TCV and nearly all of Peloton’s existing institutional investors ploughed further funds in, including Tiger Global, True Ventures, Wellington Management, Fidelity, NBCUniversal, Kleiner Perkins and Balyasny. Felix Capital and Winslow Capital were among the new investors to join the register. It has raised just under $1 billion in total since it was founded.

The latest funding round gave Peloton a valuation of $4.15 billion but some reports suggest it could target a valuation closer to $8 billion when it goes public. However, with such a mixed performance among big name IPOs this year, many believe it will be at the lower end of that range. The number of shares it will float and at what price is yet to be revealed.

Read more: Tech IPO pipeline and the top tech listings coming in 2019

There is also no guarantee that Peloton will go ahead with the IPO. ‘Changing market conditions’ have forced several companies to make a U-turn, including SoulCycle which backpedalled on its listing last year after initially announcing its plans back in 2015.

How to trade Peloton’s IPO

If Peloton goes ahead with its IPO, then you will be able to trade Peloton shares after its listing with IG. You will be able to speculate on the future price movements of Peloton shares by using IG’s CFD services.

Peloton: gearing-up for an uphill challenge?

Peloton is emerging as a new leader among the wave of companies trying to bring the fitness and wellness market into the digital age. The firm is keen to broaden its suite of web-connected home-gym products and be regarded as a lifestyle brand among its cult-like following. The company is multi-faceted: selling the equipment, signing up the subscriptions and creating the content. While that brings its own challenges, some will welcome a tangible company like Peloton at a time when so many companies are light on physical assets.

More and more smart products are entering the home and there is no reason why this shouldn’t extend to gym equipment. Technological breakthroughs that lie just around the corner, such as the move to 5G and mass adoption of things like virtual reality and wearable tech, provide ample opportunities going forward – and those that are investing now, like Peloton, will be best placed to capitalise.

However, some companies that are built around hardware have not fared so well after going public in the past. Smart speaker maker Sonos has lost over 40% in value since listing last August while share prices in head-mounted camera maker GoPro and wearable fitness tracker Fitbit have fallen over 80% since their respective IPOs.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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