Racquetball Betting

Peloton’s big bet, revealed in 1 chart

Even if you don’t monitor all emerging companies, you probably know Interactive Platoon (PTON -0.93%) as fitness equipment which has gained popularity during the pandemic. Its recently unveiled exercise bikes, treadmills and now rowing machines are premium picks in each of their respective categories. The new rower, for the prospect, will cost $3,195 when it finally becomes available for purchase.

What you might not realize, however, is that Peloton’s goal isn’t just to make fitness equipment. It’s just a means to an end. The core business model here is generating recurring revenue through subscriptions to trainer-led workouts, both with his machines and the mobile app. To that end, the company served 6.9 million subscribers in the fourth quarter of fiscal 2022, and those subscribers collectively paid Peloton $383.1 million during the period. Of this figure, $260.3 million was converted into gross profit, constituting the entirety of the company’s total gross profit.

And this is the crux of a key problem. While the impending debut of the company’s “Row” machine is likely to spur another wave of subscriber signups, subscription growth was flat last quarter. This at least vaguely suggests that a business model built around (very) high-end exercise equipment may not be a model with great growth longevity.

Subscriptions are the real workhorse

The chart below tells the story quite clearly. The pandemic has proved a boon for the company, prompting the purchase of fitness equipment by millions of people stuck at home. It also boosted subscriptions to Peloton trainer-led training services; even after sales of its treadmills and exercise bikes peaked last year, the company continued to add a modest number of subscribers.

As the chart also shows, however, the combination of slowing sales, higher costs and logistical headaches has made selling its exercise equipment an increasingly unprofitable business. Gross profits on bicycles and treadmills have turned negative for a few quarters now, effectively offsetting profits on subscriptions.

Data source: Peloton Interactive. Note: Total membership includes both Connected Fitness and Peloton Digital subscribers. Table by author.

That’s only part of the disturbing story here, though. The other half of the concern here is… go back and take a closer look at the vertical bars representing the number of Connected Fitness subscribers and the total number of members that Peloton currently serves. Neither budged last quarter. Connected Fitness’s subscriber count of 2.96 million was essentially flat from the prior quarter, while total membership increased from 7.0 million to 6.9 million. To this end, subscription revenue and profits are also stabilizing.

There are a handful of reasons for the slowdown in Peloton’s two profit centers. One of them is the slowdown of the pandemic. Although COVID-19 continues to spread, people worry less and less about it, opting to resume their pre-pandemic routines, including outdoor fitness activities.

Another reason also stems from the decline in coronavirus contagion – consumers are joining and joining gyms. The International Health, Racquet & Sportsclub Association reports that health club memberships in the important US market recently hit a record high of 66.5 million people. Marketing consultancy Mspark says fitness foot traffic in June was 26.2% higher than it was three years ago, before the pandemic.

Then there’s the often unspoken reason: most of us just aren’t as disciplined or committed to exercise as we like to think.

In its quarterly report released in August, Peloton conceded that it did not expect to see significant sequential growth in net subscriptions in the current quarter.

Row is not the game changer we so badly need

That was before the company officially unveiled its new rower, of course, which had been widely anticipated. Indeed, it was so widely anticipated that analysts forecast – and continue to forecast – revenue growth of 13.3% in fiscal 2024 after the likely 14.7% sales decline in the 2024 financial year. ‘current year. Next year’s revenue growth is also expected to halve Peloton’s projected loss per share of $2.05 for the fiscal year just begun. High-margin subscription revenue and savings from the recent decision to outsource its equipment manufacturing are factors considered by the analyst community.

Still, it’s a pretty bold bet, in light of all the related trends we’re seeing.

Of course, there is interest in the Row. Peloton will almost certainly see an increase in sales due to its launch. By how much, however, and to whom? The demand for rowing machines is small compared to the demand for treadmills and stationary bikes, and to the extent that there is a market for interactive rowing machines, cheaper alternatives to the $3,195 Row are readily available from brands such than NordicTrack and Echelon.

Are they copycats of Peloton’s idea of ​​making the exercise experience immersive? You bet. It does not matter.

Their comparable trainer-led workout subscriptions are also less expensive, with key differences between these competing offerings becoming harder to spot.

Too risky a bet

Connect the dots here. Sustaining subscription growth is difficult when the underlying demand for fitness equipment is declining. This will become even more difficult in the future, despite the upcoming introduction of a new rowing machine.

It’s a concern for Peloton shareholders simply because without any clarity about the plausible profitability of equipment sales — or any real clarity about future demand for it — subscription earnings were the sole driver of growth. profits to which investors could cling. Now they can’t even feel good about doing that.

Bet on Peloton Interactive if you must – just be aware that it is a high risk investment.