Peloton wants IPO investors to believe it can kill the gym

“One more effort . . . find that beat!� shouts Cody Rigsby, a Peloton instructor, from the 22-inch screen of one of the company’s $2,245 exercise bikes.

The 7-year-old exercise company is now also trying to work investors into a lather after filing for an initial public offering later this year on the Nasdaq that it hopes will raise at least $500m.

Peloton’s $4-billion valuation, at the time of its last fundraising, rests on the idea that it does not just sell fashionable bikes, but that it is a media company, a Netflix of exercise, pumping out live and prerecorded content to subscribers who believe it is a better proposition than gym classes.

The company says it produces more than 950 videos a month from its studios in New York and London, which can be watched not only on bikes but also on phones or its new treadmill. A subscription costs $39 a month in the United States.

Frederic Court, founder of Felix Capital, which invested in Peloton when it first expanded out of the U.S. in 2018, said that he had “never seen a company with so much customer love.�

“There is so much enthusiasm from the user around the product. That is quite rare to see such a commitment.�

Peloton’s growth has boomed along with the wider fitness market. In September 2015, one year after it released its first bike, the company had about 11,000 monthly subscribers.

Today, it counts 511,202, plus a further 102,000 subscribers to its digital boot camp, yoga and running classes who do not own a Peloton bike or treadmill, according to its prospectus. The group says it has so far tapped only a fraction of its addressable market, which it pegs at 67 million households.

According to a 2018 report from the International Health, Racquet & Sportsclub Assn., 183 million people have gym memberships worldwide. Peloton is optimistic that a significant share of those members will swap their gym cards for a home bike or treadmill.

But its prospectus shows how expensive its marketing campaign has been, and although revenues more than doubled in the year to June 30 — rising to $915 million from $435 million the year before — its losses rose nearly fourfold to $196 million.

The listing also comes at a time when consumers are being flooded with fitness and wellness apps, hacks and memberships. Investors are wary that too much capital has flowed into the industry, allowing companies to pursue growth over profits. According to the most recent report from the Global Wellness Institute, the fitness and meditation industry was worth $595 billion in 2017.

Peloton sees its main rivals as high-end gyms and the likes of SoulCycle and Flywheel, which have both found cultlike followings for their high-intensity cycling classes. It now has 2.4 times as many riders as SoulCycle, which pulled its own plans for an IPO, according to data from the analytics company Second Measure.

SoulCycle and its high-end gym operator owner, Equinox, were also recently hit by calls for a boycott because they are owned by Stephen Ross, the Donald Trump-supporting property developer.

Peloton itself is locked in litigation after it used music in some of its beat-heavy fitness videos that music publishers allege were not properly licensed. When the company removed some of those classes from its catalog, it encountered backlash from its riders.

It faces other companies encroaching on the fitness-at-home market. Mirror, for example, offers fitness classes beamed out of a mirror-like screen on the user’s wall. It reached a $300-million valuation in June. Zwift also offers a virtual cycling experience.

Paul Davies, head of leisure research at Mintel, has also warned that users outside of the United States do not appear as keen on the company and that roughly 98% of Peloton’s equipment sales have been in America.

“Awareness of Peloton is actually very, very low in the U.K. There are a lot of people out there who probably aren’t aware that you can pay for streamed workouts at home. I think part of this investment will be about boosting the brand,� he said.

John Foley, Peloton’s founder, who told the Financial Times in a 2015 interview that it was “bone-crushingly hard� to raise money ahead of its launch in 2014, wrote in the prospectus that Peloton “sells happiness.�

But as the company identified in the risks to the business outlined in the S-1 filing, it will join a roll call of loss-making tech companies, including Uber, Lyft and Pinterest, which could put investors off.

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may not achieve or maintain profitability in the future,� it said.

But one source close to the company said that he did not think they would find it hard to attract investment. “To date they haven’t struggled for investors,� they said.

Copyright the Financial Times, 2019.