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Peloton's IPO under the microscope - What you need to know

Based in New York City, Peloton sells exercise bikes and treadmills while streaming fitness classes for their subscribers from the comfort of their own home. It’s one of the latest trends in the new digital age and the company has profited off the movement, commanding a premium price of $39 a month per member.

Peloton updated its filing with the Securities and Exchange Commission (SEC) earlier this month, and is now set to charge $26 to $29 per share in its initial public offering (IPO), seeking to raise $1.16bn and with a valuation of up to a desired $8bn. 

Peloton’s IPO follows recent increased scrutiny around unprofitable unicorns looking to go public, such as Uber, Lyft and WeWork.

$1.16bn

Peloton's targeted raise

 

Is Peloton a success story? 

With 511,000 subscriptions at $39 a month each, Peloton is definitely raking in the cash. Peloton has also secured a further 102,000 people who pay $19.49 a month for their digital membership, wherein they don’t have to worry about the added expenditure of purchasing an exercise bike or treadmill.

Breaking down Peloton’s statistics, revenue has been one of the high points for the company, doubling in the most recent fiscal year as Peloton hit $915m as of 30 June compared to $435m in 2018. 

The 2019 fiscal year also saw a 106.3% increase on the previous year’s sales of its fitness machines alone, from $348.6m to $719.2m. Subscription revenue grew by 125.6% over the same time period, producing $181.1m in revenue, up from $80.3m. 

$915million

Revenue for fiscal 2019

Unlike the We Company and Datadog Inc., Peloton is more clearly tied to the technology sector through its streamed exercise programmes, which will arguably allow its IPO to be more clearly defined despite the fact the company itself claims to hit multiple sectors.

Peloton has previously described itself as a media company, a product-design company and a retail company, as well as a technology company while according to the Company’s CEO John Foley, “Peloton sells happiness.”

 

What are the problem areas? 

Although revenue growth has been a success story for the digital exercise company, it has incurred operating losses in every year since it began in 2012, losing more than $300m in the past three years alone. In 2019 losses outweighed revenue growth, which is a point of concern for investors as the company looks to go public. Losses saw a huge 308.35% increase in 2019 at $195.6m – up from $47.9m in 2018. This was bad news for shareholders as, according to MarketWatch, they saw an increase in losses due to convertible debt.

“Peloton sells happiness” - CEO John Foley

Peloton also admitted to having weak internal controls in relation to financial reporting. In its SEC filing the company openly disclosed the fact that it does not have adequate control over “information technology general controls, controls to address segregation of certain accounting duties, timely reconciliation and analysis of certain key accounts and the review of journal entries.”

Real estate costs have also been a sore spot for Peloton. With its base out in Manhattan, the company has a 21-year lease for a production studio for its streaming content, and more recently has signed a lease for new headquarters (expected to open in 2020) until at least 2027. Peloton has so far disclosed a total of $784.9m in operating lease obligations - costing almost as much as the total revenue generated for 2019.

 

What’s next?

As it stands, Peloton has announced it intends to sell 40 million shares in the IPO. Its underwriters, JP Morgan and Goldman Sachs, will be able to purchase 6 million shares. Peloton plans to have a dual-share structure, meaning early investors with Class B common stock will receive shares with 20 votes, as opposed to holders of Class A common stock who will have just one vote per share. 

CEO Foley currently owns 6.2% of Class B shares, while president William Lynch owns 3.1% and CFO Jill Woodworth owns 1.5% - board member Jon Callaghan, who is manging director of venture capital firm True Ventures, owns 12% of Class B shares.

Having started its IPO roadshow earlier this month the company has been presenting in Frankfurt and London, as well as meeting with investors across Toronto, New York and San Francisco. Shares will be officially priced on 25 September, according to Bloomberg, and the expected IPO date listed on NASDAQ is the 26 September, with the shares listed under the ticker PTON. As Michael Kawamoto, an analyst with D. A. Davidson & Co., told Bloomberg, “the path to profitability will be the No. 1 focus and I think that would do a lot for their valuation”.

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