Peloton: pedalling a dream

Peloton's losses ballooned from $48m to $196m last year.

Lex COMMENT

Peloton will have to spin the wheels on its pricey exercise bikes a lot harder to convince investors it is worth US$8 billion.

The US home fitness start-up hopes to sell 40m class A shares at US$26-US$29 a pop. A listing at the top of that range would raise $1.2bn, valuing Peloton at $8.1b. That is a big step up from the $4.2b valuation of Peloton's last private funding round.

The company sells fitness equipment, namely stationary bikes ($2,245) and treadmills ($4,295) equipped with internet-connected screens. Users pay $39 a month to watch its classes from the comfort of home.

Peloton's IPO prospectus has all the right buzzwords. It pitches its spinning-streaming mash-up as a "new, immersive and connected" experience. Taking a page from the hype for WeWork, Peloton chief executive John Foley speaks in evangelistic terms about the business, saying: "On the most basic level, Peloton sells happiness."

But like the flexible office space group, Peloton is also burning through cash. While sales more than doubled to $915m in the year to June 30, losses also ballooned from $48m to $196m.

There is nothing wrong with that, if the business can convince investors it is not pedalling hard but going nowhere. Unfortunately, four-fifths of revenues come from equipment sales. Longstanding customers, however loyal, are not going to buy new bikes or treadmills every year.

To invest in the IPO, you have to believe in Peloton's ability to lure a steady stream of new purchasers.

This is not a sure bet and at an implied valuation of around 8.7 times price to sales, it is a risky one. All the more so, given a dual-class stock structure that would give early investors super voting rights.

Fitness fads come and go. (Zumba anyone?) Nor is there any shortage of competition from traditional gyms, copycat home fitness service providers or the tendency of back sliders to revert to lives of beer, pizza and sloth. The shelving last year of an IPO from SoulCycle, which runs indoor cycling classes, serves as a cautionary tale.

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