SINGAPORE (Sept 9): What would you be willing to pay for happiness? Okay, let me rephrase my question: If happiness was an IPO, with investment banking behemoths such as Goldman Sachs Group and JPMorgan Chase & Co lead managing its underwriting, what sort of valuation multiple would you be willing to pay? I will make it easier for you: Does 15 times annual sales sound like a reasonable ballpark? That sort of valuation would mean Peloton, the maker of internet-connected fitness bicycles and treadmills, would be worth roughly US$21 billion ($29.1 billion).

“Peloton is so much more than a bike,” noted co-founder and CEO John Foley in its IPO filing last month. “On the most basic level, Peloton sells happiness.” The way Foley sees it, humans are apparently the happiest when they are in motion and surrounded by others. Peloton’s bikes and treadmills help put us in motion as we stare into a huge touchscreen in front of us with constant streaming videos of attractive trainers yelling at us to keep pedalling or run faster and push ourselves harder.  

You can choose whether you want to work out with a female or male trainer. Fitness classes run from 15 to 90 minutes and vary in intensity. A friend, who subscribes to Peloton, tells me that people like him become attached to their instructors, so they would rather have their favourite instructor work out with them. You get attached to an instructor because of the way they talk you through a series of exercises or yell at you to push yourself. These are professional instructors who know what to say or do after you have been huffing and puffing away on the bike or treadmill for an hour. That is what makes Peloton so special. Any Chinese company can peddle a copycat stationary spin bike, or treadmill for that matter, that is 70% cheaper and might even offer streaming fitness videos at half the price, but would you feel as attached to the instructor?

Path to profitability

Peloton’s detractors say it is not a tech company, drawing comparison with the controversial co-sharing firm WeWork, which is also expected to list in October. Yet, with Peloton, at least there is some visibility of a path to profitability, unlike WeWork, or for that matter, Uber or Lyft, which both listed earlier this year and where, for now, there is clearly none. Indeed, Peloton’s US bike business was profitable last year on a standalone basis, but because the company is investing in new products and services, retail outlets and is trying to expand internationally, it is losing money overall.

Whether those profits will be enough to justify its lofty valuations is, however, another story. Peloton reported US$915 million in revenues for the year ended June 30, 2019, up 110% from US$435 million in the previous fiscal year and US$218.6 million in the year before that. The New York-based connected fitness firm reported $181 million in subscription revenue for its most recent fiscal year, up from $80 million in the previous fiscal year. Peloton’s losses ballooned to US$245.7 million in the recently concluded fiscal year, up significantly from a reported net loss of US$47.9 million last year as it doubled down on sales and marketing expenses ahead of its listing.

Peloton’s management and its well-heeled investments bankers who helped craft its verbose S-1 IPO filing would like investors to believe that the company is morphing into something akin to iPhone maker Apple — a hardware company that is embracing a subscription model to sell higher-margin services. Nearly 80% of Peloton’s revenues come from selling its hardware and the remainder from subscription services. Peloton’s hardware includes fancy bikes, which have a 22in iPad-like touchscreen fitted on them and cost $2,245 each, and a treadmill that costs $4,295. Peloton customers subscribe to the company’s digital library of fitness content, including 5,000 spin cycle classes, streamed live and on-demand, for US$39 a month. 

Classes are streamed live from Peloton’s cycling studio in New York and uploaded to the company’s subscription service, from where you can stream the videos for your workout. If you are in New York or one of the cities in which Peloton has its studios, you can go there and work out alongside the instructors. A total of 58 million workouts were completed by Peloton users in FY2019, while membership has risen to 1.4 million in the US. Over the past year, Peloton has begun marketing heavily in Canada, the UK and Germany. The rest of Europe, Australia and Asia are next.

Replacing gym membership

Connected fitness, no longer seen as a fad, is now a fast-growing industry that is replacing the neighbourhood gyms we go to. Aside from Peloton, a number of other companies are selling connected fitness equipment such as bikes, rowers and treadmills, including FlyWheel Sports, NormaTec, Hyperice, Hydrow and NordicTrack. There are also iPad or other tablet apps that offer streaming classes in yoga, cycling, running, stretching, toning and strength training. 

The move away from gym memberships to connected fitness is understandable. Gym memberships in large US cities are not cheap, although there are inexpensive gyms such as Planet Fitness or LA Fitness, where you pay US$16 to US$25 a month in the first year. Even the YMCA in New York costs US$42 a month. Higher-end gyms such as Equinox, where you get nice fluffy towels, will set you back US$180 a month. If you think that is pretty steep, you have probably not heard of the cultish SoulCycle, which charges US$34 for a single 45-minute workout class on its stationary bikes.

Peloton does not just make money selling its branded connected bikes and treadmills or wooing bike owners to subscribe to its monthly plans. Last year, Peloton opened up its platform to anyone with access to any kind of stationary bike or treadmill, or indeed anyone interested in connected fitness. For just US$19 a month, through its Peloton Digital app, you can now stream unlimited bootcamp, strength, yoga, running and cycling classes with Peloton’s basic plan on your smartphone or tablet, which you can strap on your stationary bike or treadmill at home or in the gym you go to. You can use the app for yoga or strength training or to count your walking steps. 

I don’t have a Peloton bike in my condo’s gym but I do use its app to track my workout when I am on the gym’s unconnected treadmill or when I am brisk walking around the neighbourhood or the park nearby. The app includes recorded video and audio workouts and allows you to subscribe to live on-demand workouts.

Founded in 2012, Peloton has raised US$994 million in venture capital funding so far. Investors include mutual fund giant Fidelity Investments and Tiger Global Management, run by Chase Coleman. At its last funding round late last year, Peleton was worth US$4.15 billion and Wall Street analysts have been abuzz with IPO valuations of up to US$9 billion. Even if its growth slows to around 50% annualised rate in the current fiscal year, down from 100% growth in the last fiscal year, it would mean revenues of US$1.4 billion. Stock of enterprise video software firm Zoom Video Communications, whose revenues have doubled year-on-year over the past 12 months, has been trading at nearly 40 times earnings. A 15-times revenue multiple would give Peloton a market capitalisation of nearly US$21 billion.

Sticky platform

Peloton may be a niche connected fitness player, but it has a sticky platform. The average user tries out a Peloton bike or treadmill three to four times a week, according to statistics in its IPO filing. It has a 12-month retention rate of 95%, or just 5% annualised churn. Gyms used to be a cyclical business that did well at the start of the year, raking in joining fees as a lot of people signed up as part of the New Year’s resolution only to drop out as the year progressed. Peloton users, it seems, are more motivated to keep fit than just sticking with their New Year’s resolution. Most Peloton users who signed up four years ago are still taking an average of eight classes a month.

Little wonder, then, that Peloton has gross margin of 43% on its bikes and treadmill hardware. Apple, the world’s most profitable tech hardware maker, has gross margin of 38.5%. Analysts estimate Apple’s gross margin on its core product iPhone is more like 33%, so for a bicycle maker that clearly does not yet have scale to chalk up such high margin is a huge plus. On its streaming subscription business, Peloton has gross margin of 45%. While that is way below what most subscription software companies that have 70% to 80% margin earn, it is still nothing to scoff at. 

Peloton may not be the Apple of connected fitness, but tech strategist Ben Thompson of Stratechery says it is “basically the Netflix of exercise attached to a $2,000 set-top box”. Peloton does not sell software, nor does it have software margins, but then, neither does Netflix, he notes. Both are fundamentally enabled by technology. “The key breakthrough in these disruptive products is the digitisation of something physical. Netflix digitised time, Airbnb digitised trust, Facebook digitised offline relationships,” he argues. “In the case of Peloton, they digitised both space and time: You don’t need to go to a gym and you don’t have to follow a set schedule.”

Clearly, Peloton is a great company with a product and service that customers want. Yet, there is a difference between a great company and a great stock. Whether investors are willing to pay the sort of valuation for Peloton that they were once willing to pay for Netflix or Amazon.com is unclear. I am thinking of getting a Peloton bike myself, not because it will make me happy but because I think I need more bike time even as I continue to use my gym’s treadmill. But I have decided to give the IPO a miss.


Assif Shameen is a technology writer based in North America