Peloton Interactive (NASDAQ:PTON) beat earnings expectations, but the stock fell anyway. The excuse was that future forecasts fell short.
In fact, the action showed the power of short sellers. Before earnings, the stock’s “short ratio” rose to 117%, meaning every share available was being sold short, and then more.
A loss of $55.4 million, 20 cents per share, on revenue of $466 million wasn’t bad, given that the previous year’s revenue was $263 million. But it wasn’t good enough to keep the shares above their IPO price of $29. They opened Feb. 10 at $27.83. That’s still a market capitalization of $8 billion on revenue of about $1 billion. This is still a pricey stock.
The Bull Case
Reading the company’s shareholder letter, filled with glossy pictures, hockey-stick graphs and happy talk, with the required numbers pushed to the bottom, it’s fair to scream “short it.”
Looking at the company’s “product,” a stationary bike that costs $3,000 and whose only innovation appears to be a TV screen, also screams short. So does the company’s holiday ad, dubbed “Peloton Wife,” in which a woman seems to torture herself to please a lazy husband.
But all that misses the point. Peloton isn’t designed to be a “product” at all. It’s designed to be a service company, a Netflix (NASDAQ:NFLX) in the fitness realm, where people pay $39 per month for what amounts to unlimited personal coaching, delivered via the internet.
Peloton already has a treadmill and it plans to launch other interactive exercise products. The products, however, are all razors. It’s the online video service that’s the razor blade.
Bulls say positive reviews will lead to long-term, highly profitable growth over time. Bank of America has even put a “buy” rating on the stock, citing international expansion, user engagement and a real technology lead in a growing category.
The Bear Case
Few companies were as widely panned before their public offering as Peloton.
Wrote one skeptic. “I saw this movie 20 years ago. Peloton is Webvan, it’s Pets.com, it’s CMGI. It’s the 1990s.” Wait. That was me. When, despite my negative review, the stock rose after its public offering, I wrote it was “time to take profits.”
Exercise is a tough business. Gyms like Planet Fitness (NYSE:PLNT) and privately held LA Fitness compete with non-profits such as the YMCA. There’s always another great idea coming around. Here’s one. FitWit, with things like battle ropes and weights on pulleys, offers classes with real camaraderie. Just a year after FitWit opened, my YMCA had a similar program. They also feature some Peloton bikes, gathering dust.
It’s tough to sustain an exercise program. Gyms may be a $27.6 billion industry in the United States, nearly $100 billion worldwide, and the U.S. market for personal trainers alone may be worth $9 billion. But the compound annual growth rate is just 2%-3%, and half the people who start an exercise program stop it after six months.
The Bottom Line on Peloton Stock
Peloton is trying to automate one of the few industries where employment is growing. Instead of getting a personal trainer who makes between $40,000 and $73,000 per year, the company says spend $39 per month for the same service in your home.
That may work, but this is a high-churn industry filled with copycats. Peloton has settled its patent dispute with another interactive bike maker but Equinox, which owns SoulCycle, has just gotten a new round of funding.
Exercise isn’t an easy business. A gym membership may be the first thing people drop when the economy rolls over. No one yet has a sustainable success formula, and I include Peloton in that.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.