Peloton (NASDAQ:PTON) stock was a lockdown beneficiary, catering to fitness enthusiasts who couldn’t get their gym fix as well as average Joes with time to kill.
Now the company is gearing up for the all-important holiday shopping season.
The company, famous for its connected spin bikes and live-streamed workouts, needs to sell more equipment if it’s to live up to lofty expectations among investors.
When the pandemic started, the concept of connected fitness devices and at-home workout subscriptions was relatively new and Peloton was one of the most recognizable names. But the bikes and subsequent treadmills came with a premium price tag, so it didn’t take long for cheaper alternatives to crop up.
Between Apple’s (NASDAQ:AAPL) fitness app and the droves of smaller copycat workout subscriptions, there are plenty of opportunities to switch providers. The risk hasn’t been lost on PTON stock owners—the share price is down more than 35% year-to-date.
What makes Peloton unique is the cost of its connected equipment. Once you’ve spent nearly $2k on the bike, spending $13 per month to be able to use it is a no-brainer.
By asking customers to invest heavily in specialized equipment, Peloton tethers them to their ecosystem and makes it harder to justify switching.
But therein lies the problem. The cost of the bike itself makes the subscription, which is far more expensive than most other platforms, worthwhile. The cost of the bike also makes Peloton inaccessible for huge swaths of the population.
A Closer Look at PTON Stock
Subscription revenue is where the real money is for Peloton—that part of the business makes up just 22% of overall revenue but with margins upwards of 60%, it makes up a much larger proportion of group profits.
So it makes sense that Peloton is lowering the price of its bikes ahead of the holiday shopping season. The group hopes it will become a must-have Christmas gift, or at very least an impulse purchase after a few too many nights of festive food.
The group knocked the price of its bikes down by $400 to spur on demand, a necessary sacrifice to boost more profitable subscription revenues.
The trouble is, even with $400 off, the bike is still expensive. Together with the lowest-tier annual subscription you’re looking at a $1.6k investment for a year’s worth of spinning. An annual gym membership costs about a third of that.
That’s not to say people won’t pay for it, but it’s certainly a question mark when it comes to evaluating PTON stock’s long-term prospects. Bike sales will be an important metric to watch moving forward, as we should see a dramatic spike following the group’s price cut. If it fails to move the needle, Peloton execs will have to go back to the drawing board to work out how to spur on signups.
Before the cut, the group’s margin on connected equipment was 29%, so there was plenty of room for price changes. If all goes to plan, the lost profit from bike sales will be easily recouped by higher-margin subscription sign ups. Looking further into the future, it means the group may even be able to squeeze more dollars out of existing subscribers with price hikes and new membership tiers. But it all starts with roping in sticky members, so people need to start buying bikes.
The Bottom Line
If Peloton bikes don’t start flying off the shelf with their new lower price tags, PTON stock could be in trouble. The company’s built its business on the promise of connected devices driving long-term signups.
There’s an argument to be made for the subscription service on its own, but its only real differentiator is the connected bikes and treadmills that come with it. Without those, it’s hard to see the reason to stick with Peloton—particularly for those who have a smartwatch that they can link to another platform.
With that said, PTON stock’s come down substantially as investors digested the group’s dilemma. Shares change hands for roughly 6 times sales, compared to upwards of 15 times back in December.
If the new lower-priced bike drives subscription sales as intended, shares could rerate substantially, but a $1,500 investment to sign up to a fitness platform feels like a massive barrier to entry that will keep Peloton on the back foot until it finds another way to set itself apart from peers.
On the date of publication, Laura Brodbeck did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Laura Brodbeck has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.