Peloton Interactive (NASDAQ:PTON) has deservedly gained the title of the Netflix (NASDAQ:NFLX) of Wellness. It is a story of a bike company that became a global content brand.
Its recent success has been helped by the pandemic that trapped people across the globe inside their homes, providing the sports entertainment company both a captive and a lucrative audience, with total workouts growing from 48 million just a year earlier to 171 million in the last quarter.
Inside The Hollywoodization Of Peloton
In many ways, Peloton operates similarly to an old-school Hollywood studio. It creates star instructors who are on multi-year contracts. It produces its own content and controls its distribution.
CEO John Foley, a former president of e-commerce at Barnes & Noble (NYSE:BNED), wanted to shoot for the moon, as he aimed to license tracks from bands he loved, including The Rolling Stones. As a result, Peloton landed Jay-Z and only a few months later, it got Meghan Trainor to record a cover of "Crazy Little Thing Called Love".
That same year, the brand underwent a transformation from being known for its bikes to being known for its content. It is that year, 2018 when Peloton gifted the world with its digital app. It made stars out of its instructors like Robin Arzón, who now has 770,000 followers on Instagram. It was also the year when it raised $550 million in funding to build a Netflix-like media empire. Only three years later, a major part of what Foley envisioned when he reached for the stars came true. The company, which went public in 2019, now has a market cap of around $30 billion. It has signed deals with Peloton member Beyoncé on classes that celebrate her music and member Shonda Rhimes on a campaign called Year of Yes that is designed to build self-confidence and encourage regular exercise.
Peloton, whose bikes start at $1,895, did it by carefully controlling its production values, smartly promoting its instructors, and making music integral to its brand signature. It now produces 19 new classes a day and offers them in the U.K., Germany, U.S., and Canada.
Peloton Did Some Heavy Lifting
Along with the voluntary recall of its two treadmill models in May after the death of a child which the company estimated as a $165 million hit to future revenue and a recently revealed data breach, Peloton has its challenges.
Peloton's pre-IPO filings and subsequent quarterly earnings reports stress that music licensing is a key risk to its business. It made its public debut while being sued by music publishers over its alleged use of unlicensed songs. Peloton responded by removing every class from its library that had at least one of the copyrighted songs. This amounted to more than half of the classes at the time. Some Peloton users refered to this day as "The Day the Music Died," and even sued the company over its claim that its on-demand library is "ever-growing." According to SEC filings, Peloton spent $31.1 million to settle the publishers' lawsuit, but the total cost may be even higher than that. Peloton reported its music royalty and streaming delivery fees rose by $81.5 million for the nine months ending March 31st, 2021, compared to the same period last year.
The post-pandemic outlook is bright
Despite in-person fitness classes restarting as the pandemic fades into history, Peloton's user base seems to be locked in. The company is proud of its low churn rate of subscribers. In its latest quarter, the churn rate was an impressive 0.31 percent, the company's lowest rate in six years, whereas Netlflix stands at 2.4 percent.
Later this year, Peloton will open its new 20,000-square-foot London exercise studios and broadcast center. In 2020, New Yorkers got its upgraded $50 million facilities.
It has begun rapidly expanding its classes to include things like bike boot camp, dance cardio, and barre to become well-known beyond its original cycling and treadmill offerings.
Third-Quarter Figures
For the quarter that ended March 31st, Peloton reported revenue of $1.26 billion and a loss per share of 3 cents. Its performance even exceeded Wall Street's expectations and the company saw both earnings and sales growth improve last quarter. The bottom line improved from 20 cents per share loss the same quarter a year ago whereas revenue soared 141%. In the prior three quarters, its sales grew 172%, 232%, and 128%.
Connected-fitness subscriptions rose 135% YoY and now total more than 2 million. The 12-month retention rate stood at 92%.
Delivery Delays
Delivery delays are also a result of a continued surge in demand caused by the pandemic. Although a $100 million investment that was announced last quarter in expedited shipping and the recently completed $420 million acquisition of Precor have helped bring Bike fulfillment times back to pre-pandemic levels, Bike+ shipments still face delays.
To help fix these problems, Peloton announced plans to start construction this summer on its first U.S.-based factory on May 24th. The $400 million facility, slated to open in 2023 will certainly help Peloton shorten production and delivery times in its biggest market.
Outlook
Peloton's latest earnings report is proof that strong momentum is everything bud fading. Its action to expand its manufacturing capabilities shows that the company is addressing one of its main weak spots. Foley admitting the fault, as well as revealing concrete plans to fix safety issues was exactly what investors wanted to hear.
Peloton is going through its most difficult time as a public company but this is a company that never thought small and it became a global wellness entertainment brand because of it. Its content is so good that people want to buy their expensive hardware just to use it.