Peloton Stock Has Problems That Go Beyond an Ad

Peloton (NASDAQ:PTON) has been one of the most active stocks in the last month. The company turned public in September and was trading at just over $25 ($25.76). The stock almost immediately dropped 10% and stayed in a tight range until the beginning of November.

Shares of PTON stock have subsequently jumped nearly 53%. Most of this gain was attributable to increased revenue. In the three month period ending on Sept. 30, 2019, Peloton posted an increase in year-over-year revenue for both connected fitness products and subscriptions. For investors, this helped ease growth concerns because of the high price tag for Peloton bikes.

Of course, there was another reason why the company stock was trading so actively.

It was just an ad

Or so I thought. I didn’t foresee the backlash that Peloton would get upon the release of their 2019 holiday commercial. I didn’t realize that even commercials have to have backstories. Apparently they do, and what a back story it received. But in hindsight, it shouldn’t be surprising.

Fitness is a polarizing topic. For fitness-minded individuals, a fitness journey is very personal. Some people will swear by cardio. Some will espouse yoga. Others will say strength training is the way to go. Truthfully, it’s probably all of the above, but the point is many people missed the point of the ad which, as I saw it, was a connection.

Peloton isn’t just offering a bike. They’re offering a connection to a broader community. But you don’t have to go to a gym. This is an overlooked benefit of Peloton’s brand. Many fitness enthusiasts want, and/or need, the accountability that comes from group training. But many people don’t want the anxiety of going to a gym. Peloton gives users the ability to be part of a community of riders in the privacy of the home.

For many users, that’s a priceless benefit. It’s also part of what Peloton is doing right.

What Peloton is doing right

The elephant in the room for some investors is that Peloton has an expensive product. I think those concerns, like those of the ad, reflect a lack of understanding of the Peloton target market.

When I first started golfing, any set of clubs would do the job. But once I started playing for a while, I realized that, in some cases, my equipment was holding back my potential. So when I could afford to upgrade, I was looking for specific features. And, of course, those features came with a higher price tag.

As it relates to Peloton, the cost of a Peloton bike (the entry price is just shy of $2,500) is not really the point. I don’t view Peloton as a “starter bike”. Someone who is just starting a fitness or wellness journey will most likely not start off with a Peloton bike. They can find an adequate bike at one of many retailers.

However, for committed fitness enthusiasts, a Peloton bike can make a lot of sense. And Peloton also appears to have a loyal user base. Prior to their initial public offering (IPO) the company claimed 1.4 million members and that it loses less than one percent (0.7%) to churn of its 500,000 monthly subscribers every month.

Peloton also checks off boxes by complementing many of the trends that were identified as among the most popular trends of 2019 including group training, high-intensity interval training, and personal training.

The challenges that Peloton faces

For all of their growth, Peloton is not yet profitable. And the stock, at current levels, is priced to just about perfection. That’s why the ad hiccup is so concerning. Peloton lost $1.5 billion in value in just three days due to backlash from the ad.

But the larger risk to Peloton is that they don’t have a moat. The fitness equipment space is already crowded and will continue to get crowded. Even in the premium segment where Peloton lives there will always be the challenge that comes from the next new thing. And there are already challengers that exist.

Peloton has an advantage in that, for now, they are not seeing much churn in their subscriber base. However, the company is only projected to generate about $1.5 billion in revenue in 2020. This will be done at a loss since the company is not expected to be profitable. The company has a market cap of $9.75 billion. It’s tough math for investors right now.