Do NOT Buy Peloton At Its IPO

Peter Sayles |

The IPO craze is here.

Companies got all the clear sign after the botched Uber and Lyft IPOs earlier this year when they saw what happened to Beyond Meat.

Beyond Meat has gone up over 240% since it went public May 2nd. It was up over 4x late-July. Pinterest, Chewy, Zoom Video, and Slack also had huge pops.

The second quarter was a monster quarter for companies going public. Sixty-two IPOs raised $25 billion – the highest in five years according to Renaissance Capital. It was almost the most active

These 62 companies were up an average of 30% as of June 28th.

Now we’ve got Peloton coming up – an indoor “fitness” company. Peloton has a massive cult-like following with its online bicycle and fitness classes users can workout to live.

Peloton has more 1.4 million accounts. And more than 1/2 million “connected” subscribers – double its subscribers from last year. Total subscriber

Peloton reported revenue of $915 million – double from last year too.

Growth numbers like these probably make anyone interested. But here’s the problem.

Peloton lost $196 million on $915 million in revenue. It lost $48 million last year.

This means Peloton is losing more money faster than it’s growing revenues. Revenues doubled – up 100%. But losses increased 308%.

From its SEC Filing (emphasis added): “We have incurred operating losses in the past, expect to incur operating losses in the future, and may not achieve or maintain profitability in the future”

Peloton is selling $2,000 bikes and $5,000 treadmills. Users buy the bike/treadmill once. Then never have to buy equipment again. How are they losing so much money?

Through its “original content.”

You’ve probably heard this term before. It’s the only thing that matters for Netflix.

Netflix spent more than $12 billion on content last year – up from $9 billion the prior year.

Netflix needs to spend ever more money to please its subscribers. Without original content, what’s stopping someone from canceling and looking elsewhere.

The original content arms races is on against Amazon, Youtube, Hulu, Disney, HBO, NBC, Fox, and Apple. (We actually think Apple should buy Netflix.)

The ever-increasing competition will force all these companies to spend billions more dollars each year to compete against one another.

What’s different with Peloton?

Without new content (in the form of cycling and workout classes), users will get bored. Maybe they’ll go to SoulCycle?

Mike and I (Peter) know of three friends who have bought Peloton bikes who use it occassionally or not at all. They use their real bikes or go to fitness classes.

Small sample size, we know. But nonetheless telling.

People like to get outside. They like to interact with humans. It’s always been this way.

Peloton’s business model forces itself to come up with something new and engaging every day. Or else loyalty fades.

It’s clearly doing this well… Stated 12-month retention rates are 95%. Subscriber growth was 100%. Gross margins are about 42%. It’s on the subscription model.

But is it definitive it can do this for another five years? 10 years? 20 years?

We should be asking ourselves that as investors.

Look, we’re not bearish on Peloton. It’s got big opportunity growth.

Peloton’s IPO just isn’t for us. It’s a hardware (bikes and treadmills) company trying to mold itself as a software-as-a-service (SAAS). And it has over 1/2 billion in losses these past three years.

The world is teetering on recession. Americans are more indebted than ever.

Are Americans going to buy $2,000 bikes if recession hits America?

They’ll probably apply for a cheap gym membership like Planet Fitness (PLNT) – at $10/month.

Planet Fitness is already profitable. And is growing like crazy.

We’d rather own the growing, profitable company. (Planet Fitness is currently a buy in our MightyTrades portfolio.)