This Metric is the Key to Peloton Keeping Its Lead Over the Pack – IPO Edge
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This Metric is the Key to Peloton Keeping Its Lead Over the Pack
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This Metric is the Key to Peloton Keeping Its Lead Over the Pack

Peloton Interactive, Inc. Has Monthly Subscriber Churn of Well Under 1%

By John Jannarone

Peloton Interactive, Inc. looks much fitter than many of this year’s IPOs. Does the fitness-media company have what it takes for the long haul after going public?

2019 has seen dozens of fast-growing companies go public, with the likes of Lyft, Inc. and Uber Technologies, Inc., quickly becoming disappointments. The most successful, such as video-conferencing firm Zoom Video Communications, Inc., have been businesses that hope to leverage fixed costs over time and have customers who rarely quit. While Zoom shares have pulled back from their peak, they continue to trade at more-than double their IPO price. Zoom also commands a rich multiple, with an enterprise value of 43 times this year’s expected sales, according to Sentieo.

To compare a company like Zoom with Peloton, it’s useful to break the latter into two components: the equipment sales, which consist of cycles and treadmills that customers buy upfront, and subscription revenue. While equipment sales are valuable and in fact generally offset customer acquisition costs, they usually happen just one time per customer so shouldn’t command a high multiple like subscription revenue.

Making a reasonable assumption about how much equipment revenue is worth, it’s possible to estimate the multiple being placed on subscription revenue. Assuming the shares price at the center of the indicative range and a multiple of 2 times on the $734 million of equipment and “other” revenue in the year through June, the subscription revenue of $181 million commands a multiple of 28 times, according to IPO Edge calculations.

The main reason to pay such a premium multiple? Not only should new members help subscriber revenue rise for years, but existing customers appear to quit extremely rarely. Average net monthly churn, or the percentage of members who quit the service, was 0.70% in 2017, 0.64% in 2018, and 0.65% in 2019. That’s a fraction of the churn of gym disruptor Planet Fitness, Inc., which recently said it averages 1.5% to 2.5% per month.

There are good reasons to believe Peloton can keep its churn rate very low. Unlike most fitness clubs, Peloton has found a way to make its members work out more, not less. The average member used the service 11.5 times per month in 2019 compared with 8.4 times in 2018.

Peloton is also attracting users from very large demographic groups rather than simply the rich. Peloton’s fastest-growing age cohort is under 35 years old and fastest-growing income bracket is households making under $75,000. Such customers can probably afford the roughly $97 a month all-in charge, which includes a 39-month interest-free financing and service subscription.

And there are plenty of other leisure-related industries that have been disrupted or outright destroyed by digital alternatives. Just look at movie theaters, video arcades, and of course bookstores.

Peloton also has a big head start over potential rivals that might attempt to replicate its model. While a company like Netflix might offer workout programming, the connected-machine approach would take far more investment and heavy marketing to catch up with Peloton.

The main threat? It’s important to remember that Peloton is a young company and many of its members have only been using it for a couple of years or less. There are countless fad exercise products that now gather dust in attics and garages, from NordicTracks to Reebok slide boards to Rollerblades.

For now, Peloton shares look set to outpace the IPO pack. But if they run too high after listing, investors should keep a close eye on member churn or risk a bumpy ride.

 

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