Peloton is the latest technology company to file paperwork for an imminent IPO in 2019, joining the likes of Uber, Lyft, Zoom, and Pinterest. Peloton is not a typical fitness equipment company, and boasts a business valuation similar to that of a high growth software company. John Foley, one of the co-founders and current CEO of Peloton was the subject of my favorite episodes of the “How I Built This” podcast and I strongly recommend it for anyone looking to learn more about the Peloton story from its inception.
What is intriguing about Peloton from a valuation perspective is its ability to generate recurring revenue. A few years back, when I had very limited knowledge of Peloton’s operations, I was under the impression that a customer would buy the stationary bike in a one-time transaction and ride it 3-5 times a week until his/her fitness goals were achieved. I was sadly mistaken in my understanding of the company’s business model. Peloton does not rely only on revenue from selling the bikes (hardware) at a price of around $2,000. Where Peloton separates itself is its ability to bring in $40 per month from users in a subscription-based model for the fitness classes that are pushed out to the hardware. Although the bike seems to be an extremely high quality piece of machinery, it is the fitness classes that are taught by world-class instructors with huge followings that appear to drive the value of the business.
Once Peloton becomes a publicly traded company, there will be mounds of information and data available to investors that has not been accessible to this point. This information has the potential to give investors a much clearer picture on the margin generated from the sale of the bikes vs. the margin on the monthly subscription service. When examining the business model and how it has the potential to impact Peloton’s business valuation, it is common sense that recurring revenue from the subscription service should increase valuation when compared to a typical fitness equipment retailer. Peloton is far from typical.
The recurring revenue from the monthly subscription service decreases the risk of the company. Peloton is not completely reliant to selling these stationary bikes for $2,000 and then moving on to the next one. Peloton is able to sell the bike and then continue to generate revenue from the customer on a monthly basis, similar to the way that gyms and fitness facilities charge a monthly rate to customers. Of course, the retention rate of the monthly subscription customers is a major factor in assessing the company’s risk. However, if Peloton is able to retain the monthly subscribers, investors will be more confident in a future steady income stream to grow the business, and generate return for the investors through capital appreciation and dividends.
From a simple valuation standpoint, we know that a decrease in risk results in an increase in value. A recurring revenue stream gives investors and valuators more certainty in the future cash flows of the business. When revenue is not recurring, there is more risk in the cash flows and revenues tend to have more volatility. With a recurring revenue model, a company will tend to be valued at higher multiples in the marketplace. Peloton’s valuation has been estimated at around $4 billion and it will be interesting to see how the stock fares once it starts trading later this year. Investors will be keeping a close eye on the subscription-based model and will be digging into the details once more information becomes available.
Peloton has grown a strong following since its founding and appears to be in a strong position to continue to expand at the cross-section of fitness and convenience, but the question always remains, what is next?