Some Thoughts on Peloton’s Product, Company and Stock $PTON
Disclosure: Not an investor in Peloton as of this writing. I encourage feedback — if I got something wrong or missed an important datapoint, let me know and I will update! Find me on twitter @MattLevinson
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I was late to the Peloton game. For a few years I had seen the commercials and heard about the brand. But the product didn’t particularly appeal to me. Isn’t it just another exercise bike? As a company, this seemed like a hardware play. Isn’t that hard to scale?
I didn’t understand the product, the company, or its valuation. I was only compelled to take a closer look after trying the product 6 months ago.
With earnings coming Tuesday, I’ve put some thoughts and analysis down on paper. As a private equity investor turned venture capitalist, it’s important to keep my analytical skills sharp as I underwrite our growth-stage and mature companies — so I mean it, I want your comments!
I also wanted to analyze a company outside my day-to-day fintech studies. For reading that is more specific to fintech, check out FinTech Collective’s weekly newsletter and website.
Learning to Love the Product (skip ahead if you just want the data!)
About 6 months ago, I started trying to exercise more to shed a few pounds ahead of my wedding. So I started asking friends about their workout routine.
The only product that many seemed to rave about was Peloton.
And then, right on cue, my apartment building invested in two Peloton bikes for our communal gym. So there was no cost for me to try it out, and I could just go to the basement and give it a whirl.
Since my first trial, I’ve completed more than 60 rides, usually at least two a week — and sometimes 4 or 5.
The primary reason I’m hooked? I honestly don’t like hitting the gym, but intellectually I know that I should. With Peloton I found something that I enjoy and pushes me to “full sweat” — often in just 20 or 30 minutes. The difference between loathing and sprinting to the gym is a 10x improvement, versus an incremental change.
How much would you, or should you, pay for something that helps you become a healthier person? And saves you time relative to alternatives?
This realization made me think the audience of people valuing their health and/or time might actually be quite large (see more on market size below)
For me, the key is the *content*. The trainers are excellent — shout out to my favorite, Robin Arzon — who told me my first ride was a “funeral for my excuses.”

You can filter for length of class, instructor, and music type. You can also select the “kind” of workout you want — e.g. a 90s pop ride, or a high-intensity interval ride.
At its core, Peloton may be the first company to *scale personal fitness instruction*. I respond to having a coach challenge me, and I suspect there are many others like me - with true “gym rats” being the exception. This explains the rise of companies like Spin and Soulcycle — but streaming is the best way to scale this to millions of people.
What is $PTON Worth Today — And Is It Valued Correctly?
First, let’s clarify how the market currently values Peloton. The company has a market capitalization (fully diluted shares * stock price) of $7 billion as of 11/1/2019.
But the company also raised $1.16b in cash at its IPO. And prior to the IPO, the latest balance sheet showed $162m in cash, $216m in cash-like short term investments, and $171m of long-term liabilities. As a result, the enterprise value of Peloton today stands at $5.6 billion (market cap+debt-cash).
In other words, the market believes the net present value of Peloton’s future cash flows is $5.6b.
However, valuation here is an art more than a science. Peloton is a high growth company that is currently *burning* cash — so cash flow is hard to predict.
Fred Wilson discusses this tricky valuation dynamic beautifully in his blog. We don’t have cash flows, but can attempt to paint the picture by analyzing revenue, growth, gross margins, and potential operating leverage over time.
We can also evaluate the efficiency of sales and marketing spend (and capex, in the case of Peloton). If that capital is paid back quickly, with a high ROI (LTV:CAC), the short term “investment” of cash burn can be well worth it.
Business Model and Revenue
The first thing to understand about Peloton’s business is its “razor / razor-blade” revenue model. The bike retails for $2,245, and its newer treadmill for $4,300. Alongside these “connected fitness products,” customers purchase streaming content for $39 a month. You can also purchase the content, sans hardware, for $19.49 per month.
The subscription revenue is a small but growing % of the business. But it’s stickier, recurring revenue that investors value more than hardware.
Here’s the annual revenue data for the last 3 yrs:

Subscriptions, which grew from 15% of revenue to 20%, have experienced astounding growth — 147% in fiscal 2018 and 126% in fiscal 2019.
And the non-recurring hardware revenue also grew over 100% year-over-year.
Looking at the quarterly revenue data, we can see the seasonal lumpiness in hardware sales. Hardware revenue is seasonally strong in fiscal Q2 and Q3, and weak in Q1 and Q4. Subscription revenue, meanwhile, is a steady-eddy growth story.

Over the last two years, quarterly subscription revenue has grown more than 4x — from $14.3m to $61m. It peaked at 27% of total revenue in the most recent quarter — a seasonally weak hardware period.
Since 2017, the company’s overall revenue growth has roughly tracked the subscriber growth.

And it’s not like they are attracting users who aren’t engaged — with workouts per user steadily growing over time.

Gross Margins — An Initial Valuation Benchmark
Interestingly, Peloton has exhibited roughly 43% gross margins across both hardware and software.

Looking at quarterly gross margin data over the last two years, margins have been lumpier as the company looks to rationalize its cost structure — including hardware costs and music licensing.
Can Peloton retain 52.3% subscription margins from the most recent quarter — or even improve on that going forward?

Interestingly — of the $77m in gross profit attributable to subscriptions over fiscal 2019, $32m came in the 4th quarter — implying a run-rate subscription gross margin of over $120m.
Fred Wilson recently discussed gross margins as a valuation benchmark when looking at high-growth companies. When cash flow is absent, at least it’s a better baseline than a revenue multiple. But who can we compare Peloton to, from a gross margin perspective?
On the hardware side of the business, the best comps for Peloton may be Apple and Tesla — high growth hardware businesses, with mostly non-recurring revenue, but with strong growth and A+brands.
On the software side, Spotify and Netflix are decent comps — recurring revenue and high growth, with content costs pushing gross margins below 50%.
Given the recent growth in Peloton subscriptions and margins, we should also consider run-rate metrics on the software side.
Here’s the quick-and-dirty analysis, calculating what Peloton might be worth based on the enterprise value / gross margin ratio of these comps:

A bit further down, I’ll discuss multiple compression when considering future returns. For now — this quick math roughly triangulates to Peloton’s enterprise value today.
The hardware business may be worth $3b –$4b (using Apple and Tesla gross profit multiples). Though Apple trades at 12x gross profit and Tesla at 14.5x gross profit, Peloton’s hardware business is actually growing much faster while exhibiting higher gross margins.
Peloton’s software business may be valued at $2b or more if the next quarter further validates the strong margins (52%) and growth (126%) shown in the most recent quarter. [Note that the “run-rate” software comps on the right-hand side are using a more aggressive revenue and gross margin calculation (most recent quarter * 4) — hence the lower multiples].
Perhaps the most striking observation from the data above, however, is that Peloton is growing significantly faster than the comps — on both the hardware (106% year over year) and software (126% year over year) sides of the business.
Growth, if sustainable, always provides some basis for valuing a business ahead of its traction — and at higher multiples than the comps. If you think $5.6b is too low for Peloton, your reasoning likely comes back to growth.
But there are two primary objections the bears will make to this growth story:
- The spend needed to sustain this growth could have a poor ROI — making Peloton a perpetual money loser.
- Perhaps the market opportunity is too small —it’s a pretty expensive bike after all — and this growth rate will fall off cliff.
Are one or both true? Let’s dig a bit deeper.

Opex efficiency and Unit Economics: LTV / CAC and CAC Payback. Caution: Estimates abound
In a prior article, I gave a basic framework for thinking about unit economics — or whether or not short term cash burn is actually a good investment.
To address the efficiency of Peloton’s spend (and the rationality of burning $108m from operations and $80m in capex last year), we need to look at the unit economics.
LTV:CAC Analysis — Focused On Today’s User Base (Subscribers With Bike)
- Churn: According to the S-1, Peloton’s subscriber churn has historically ranged from 0.64% to 0.7% monthly. Using the more conservative 0.7%, the average expected customer lifetime is 11.9 years.
- Lifetime value for subscriptions: 11.9 years * $39 / month * 12 months / yr. * 52% contribution margin = $2,900.
- Total lifetime value: $2,900 subscription LTV + $2,245 per bike * 43% gross margin per bike = $4,000.
- CAC: In fiscal 2019, the company acquired 265k new subscribers, and spent $324m in sales and marketing in the process. This implies a CAC of roughly $1,222. In fiscal 2018, the company acquired 138k new subscribers, and spent $151m in sales and marketing — implying a CAC of $1,097.
- Putting together LTV:CAC: Roughly 3.3x ($4,000 / $1,200), which is solid (though not spectacular). But it might be better than that. Our LTV is based on the high-end of churn, and CAC can be optimized as the brand grows and people have more “try before you buy” options (gyms, hotels, and Peloton’s own free home trial). If in the future more people buy subscriptions without the bike, CAC could also come down with lower onboarding friction.
- CAC payback period: The most interesting piece of the unit economics story, however, is the CAC payback period. At a 45% gross margin on a $2,235 bike, Peloton recoups about $1k up-front — nearly covering their CAC. This dynamic of rapid CAC recoupment means that burn can be minimized even during periods of high growth.
Market Size. How many people will really buy a $2k bike?!

Peloton’s TAM is likely the most controversial topic. I suspect many bears will staunchly posit that a $2k bike is inherently limited in its appeal. And they may be right — I likely never would have tried it if my building didn’t buy them.
But anecdotally, I’ve now stayed in a number of hotels that have Pelotons in the gym. And as more apartment buildings and commercial gyms follow suit, more people will have a “try it before you buy it experience.” Not to mention, the company now offers a 30-day trial with free home delivery, and no cost if you choose to return it. And with a greater installed base, more friends and family will try it out.
Now that I’ve started using the bike, I’ll 100% buy it if and when I move to a house or building that lacks Peloton. My health and time are worth more than $2k and $40 per month!
When it comes to TAM, the key question is whether the market opportunity supports the growth and outcome you’re looking for as an investor. If you’re a bull targeting a 3x return on your money in the next 5 years (or roughly $17b enterprise value), what do you need to believe to get there?
Let’s conservatively assumed the blended enterprise value / revenue multiple comes down 20%, from 6.2x today to 5x. To get to a $17b valuation, Peloton would need $3.5b in revenue — roughly 3.5x where it is today.
That’s roughly 2 years of growth at the fiscal 2019 clip — so a 5 year timeline seems achievable.
Viewed another way — if the business composition stays roughly the same, a $17.5b valuation would equate to roughly 2m subscribers, and over $2b of annualized hardware sales in support of the growing user base (500k-1m bikes, treadmills, or other).
2m subscribers is 3% of American households aged 18–70 with $50k+ total income. If you include the U.K., Canada, and Germany, it’s less than 2%.
2–3% seems achievable, and doesn’t even include the opportunity to sell into gyms, hotels, apartment buildings, and other shared spaces.
So — that’s one conservative approach to TAM. But more aggressive bulls will ask — what are the exciting vectors that could expand the TAM materially over time? Here are a few:
- New products: When I go to my gym, I see a vast array of equipment that seems old-fashioned and disconnected relative to Peloton. Peloton could increasingly address more and more of the gym. They already offer digital content that spans cycling, running, weightlifting, strength training, yoga, meditation, and more. To get started, Peloton recently launched a treadmill, and could opt to compete with (or acquire) Mirror as well.
- Digital only: American consumers are getting used to digital fitness guidance — and Peloton’s digital $20 subscription could gain much more of a mass-market following. Aaptiv, a digital-only competitor of Peloton, has raised over $60m from top-tier VCs on the premise of pursuing that strategy, without any hardware. Meditation app Calm has been valued over $1b for self-directed meditation (an offering Peloton also provides in its app). Relative to these startups, Peloton leads in terms of brand (with a cult-like following) and resources (with well over $1b of cash in the bank, and access to capital markets).
- International: While they’ve dipped a toe in other markets, this is a U.S. company today for all intents and purposes. Other developed markets are likely ready for the bike, and even more markets are addressable for digital.
The Unanswered Questions
We’re constricted by the information revealed in the S-1. As a private equity and venture capital investor, I usually have the benefit of a full dataroom and access to management.
So — what else might I ask Peloton for, given the chance?
- Vendor data: How beholden is Peloton to any given given hardware vendor or music content provider?
- Sales by product: It’s unclear how the new treadmill product is doing, and what growth are they seeing in the digital-only product?
- Geographic data: Is this product only desirable in high-end cities? Are they seeing growth outside the U.S. yet?
- Demographic data: Further testing the true size of the TAM.
- Management incentives and cap table: The management team seems A+ (check out this podcast with CEO John Foley). Let’s keep them around.
- Long-term financial model: Long term view on growth, and what are the biggest revenue drivers? Key assumptions on cost drivers going forward?
- Capex planning: Last year, Peloton spent $83m on capex to scale the operation. What is the go-forward capex plan? And do they achieve leverage on this spending over time?
TL:DR: The Bull vs. Bear Case
The bear case. Bears will undoubtedly focus on the TAM-indeed Peloton may have captured many of those willing to purchase an expensive bike. They’ll also hammer on cash burn, arguing that the company may never generate positive cash flow — though the unit economics appear to suggest otherwise if they hold true over time. Go-forward capex remains a question mark. They’ll also note that potentially inflated revenue and gross margin multiples are at cyclical highs (or not the right multiples at all), and subject to collapse if and when growth stalls. They’ll argue Peloton is not a “tech company” — thought personally, I think this distinction is semantic, because it all comes down to NPV of future cash flows, software or otherwise.
The bull case: For now, Peloton is still growing much faster (100%+) than nearly all of its public hardware and software comps. If that growth is sustained, bears are going to have a very tough time. Bulls will also point to a much bigger product opportunity — taking over your gym and fitness routine more holistically, while also expanding TAM through a cheaper digital-only offering. Margin expansion would be a strong indicator for bulls — especially if software becomes more than 20% of revenue . The bulls will deflect noise around cash burn, noting the high ROI on spend — and hopefully observing that growing revenue results in a gradually improving bottom line, and path to profitability sooner than later.
If you ask me, after writing this — I’m leaning bull ;) But I think the valuation is sane, if a bit chunky — and the picture will become much clearer over the next year. GLTA!
