Markets

Peloton Has a New Trick to Win Over Wall Street

Peloton (NASDAQ: PTON) hasn't exactly set the world on fire since going public at $29 in late September. The high-end fitness specialist had the misfortune of hitting the market at a rough time for debutantes, and it has spent its first six weeks of trading below its IPO price.

In an effort to shift away from a model that centers largely around selling pricey treadmills and stationary bikes that go with its monthly fitness training program, Peloton could be tossing out a wider net. Folks familiar with the company's development plans say that Peloton is hoping to put out a cheaper treadmill and introduce a rowing machine next year. Peloton's online platform -- also available to folks with their own fitness gear through stand-alone subscription plans -- is reportedly exploring apps for Fire TV and Apple Watch owners, hoping that connected TVs and smartwatches build on its existing mobile app's presence.

A Peloton stationary bike with a cycling class on the attached tablet.

Image source: Peloton.

Working out the workout

It hasn't been easy to invest in IPO stocks these days. There's also an "eat the rich" mindset that's making the company behind the $4,295 treadmills and $2,245 stationary bikes easy to spin as out of touch with the masses. Owners also have to pay $39 a month to subscribe to the live and on-demand workout sessions that play out on tablets that are attached to the Peloton equipment.

Folks without the official Peloton gear aren't shut out though. They can buy a cheaper $19.49 digital membership that opens up limited access to the platform either through the internet or served up through iOS and Android apps, and that will be the key to growth once Peloton exhausts its current niche of affluent people on a fitness kick. The platform also offers general running, strength, yoga, and meditation classes for folks when they're not on their machines.

A cheaper treadmill makes sense, especially since quality equipment is readily available for a lot less than Peloton's stiff price. The rowing machine might not command the same reach as its first two platforms catering to runners and cycling enthusiasts, but naturally it would be incremental to the overall business. It's not outrageous to think that a well-heeled family could eventually have a Peloton treadmill, bike, and rowing machine.

Peloton's IPO might have been a dud out of the gate, but the business isn't showing any signs of peaking. Revenue more than doubled in last week's fiscal first-quarter report, soaring 103% to hit $228 million. It's not profitable -- and analysts don't see Peloton turning that corner until 2024 at the earliest -- but that isn't always a deal breaker at this stage of a company's growth cycle.

The Peloton model does work. Once you make a big-ticket investment in Peloton, you're likely to stick around with the connected fitness program, as its 12-month retention rate is clocking in at a hearty 94%. Usage is also up over the past year. The average number of monthly workouts for its 562,774 connected fitness subscribers has risen from 8.9 to 11.7 over the past year. Peloton's latest quarter showed a sequential dip in workouts per user, but there is seasonality to the usage, so this isn't problematic unless the sequential dips continue as fiscal 2020 plays out.

Peloton is out of favor with investors, and unlike some broken IPOs that initially moved higher, this is one investment that has never traded north of its $29 IPO price. But new products and a few more strong quarters can change that. Like every good fitness routine, it's the repetition of good behavior that will ultimately deliver the desired results.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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