Peloton: Survival of the Fittest
Peloton: Survival of the Fittest
Patent Filings and Other Moves Wall Street Is Missing
“I once described turnarounds as a full contact sport: intellectually challenging, emotionally draining, physically exhausting, and all-consuming … From where I sit today, that pretty much summarizes my experience these last two years … A lot of blood, sweat, and tears have been shed to make Peloton’s turnaround possible … I’ve done my very best to recruit a truly talented exec team to lead the turnaround. If I have one lasting legacy at Peloton, it will be this: You have a GREAT lead team, and although the stock market hasn’t recognized this yet, it will. It’s simply a matter of time.”
– Former CEO Barry McCarthy, final memo to employees, May 2nd, 2024
Introduction
Peloton’s stock has rebounded following its recent earnings report, but McCarthy’s message remains pertinent. Investor sentiment is slowly recovering, though short interest is still elevated at around 18%, a modest 2% drop since the earnings announcement. This analysis arrives a bit later than intended (due to a major project for The Globe and Mail, coming soon), but if accurate, Peloton’s current valuation presents an appealing asymmetric risk-reward opportunity.
In his final earnings call, McCarthy stated, “If you look at our balance sheet, you’ll see that the business is not going away, which for a long time was a systemic threat. So, because of that, we’re able to focus on renewed growth… I think you’re going to see significant product innovation over the next two years, which I’m very excited about because we have a real shot at changing the growth trajectory of the business.”
Hardware Innovation
Peloton has indeed been quiet on the innovation front, particularly in hardware—until now. Historically, the company has kept product development under wraps for competitive reasons, as CFO Liz Coddington recently reminded investors. But patent filings offer a glimpse of what lies ahead. After extensive scrutiny, some intriguing details have emerged.
The third iteration of Peloton’s iconic bike appears to be nearing release. While the current model has aged gracefully, a decade without significant updates is starting to show. Our research confirms that the V3 Bike is in development, promising more than just incremental improvements.
The more significant breakthrough, however, may come from Peloton’s treadmill lineup. Historically an underperformer—Peloton has sold ten times more bikes than treadmills—despite the treadmill market being two to three times larger. Recent patent documents hint at potential disruptive innovations. If approved, even with narrower claims, the long-term potential could be substantial.
Uncertainty remains, of course. The patent process is complex, and our investigation into related filings has been exhaustive (and occasionally tedious). Most of these details are consigned to the footnotes.
Digital and App Innovation
Peloton’s recent digital efforts show promise, particularly in personalization, gamification, and the launch of a standalone app. These initiatives could boost subscriber growth, increase engagement, and reduce churn.
Leaning Toward Hardware Agnosticism
Peloton estimates that over five million treadmills and bikes are sold annually in the U.S., mostly at lower price points. Yet its robust digital platform—with a near-perfect 4.9-star app rating—offers a pathway to attract more customers who either cannot afford or prefer not to own its hardware.
The Myth of Market Saturation
The notion that Peloton is approaching market saturation is flawed. Data suggests otherwise: unaided brand awareness is surprisingly low across most of Peloton’s product lines, except for the Bike, which has roughly 57% awareness in the U.S., but significantly lower internationally. Awareness of Peloton’s treadmills in the U.S. sits at 20%, while the app and Row have even lower recognition at 6% and 4%, respectively.
As explored later, awareness often does not translate to deep product understanding. Many consumers overestimate Peloton’s cost while underestimating the quality, variety, and overall user experience, making saturation claims premature.
Consensus Remains Conservative
Management’s FY25 guidance does not incorporate potential gains from digital initiatives, and consensus estimates are similarly conservative. Analysts expect flat revenues in FY26, but even modest digital success could see Peloton exceed expectations. This is before factoring in an innovation-driven hardware sales cycle, likely to commence by FY26.
Conclusion
Peloton may not meet the traditional definition of a “value” stock, but our analysis suggests that it presents a compelling asymmetric risk-reward profile over the long term. If directionally accurate, Peloton could substantially reduce its debt over the next three years, with a clear path to positive operating income by FY26 and meaningful gains thereafter. This view differs significantly from consensus, which justifies some skepticism. However, there is much about Peloton that remains misunderstood, both within and beyond the investment community. As we delve deeper, these misunderstandings should become clearer.
Here’s what else we’ll explore:
The company’s increasing commercial traction, marked by key partnerships with Google and Hyatt—the latter particularly intriguing.
McCarthy’s assertion that Peloton now boasts a “GREAT lead team,” why it represents the strongest lineup in the company’s history, and why this matters, especially in marketing and R&D.
The evolving competitive landscape, broader industry trends, and their implications for Peloton’s future.
Why Peloton’s efficiency has room for improvement beyond what recent restructuring efforts and public commentary suggest.
Barry McCarthy, whom we’ll introduce more fully soon, was instrumental in stabilizing Peloton. His blunt, no-nonsense approach was exactly what the company needed in a crisis. However, his style was more pragmatic than visionary—not surprising for a career CFO who was thrust into the CEO seat. Now, Peloton requires a leader who can rally the company around a compelling vision, inspire employees, and excite customers.
It’s hard to miss the symbolism of launching a refreshed version of the bike that put Peloton on the map, just as the company prepares to announce a new CEO and turn the page to a new chapter. That leader could be revealed any day now, as interim co-CEO Karen Boone hinted during the last earnings call: “We’ve been very focused on it. We are far along in the process ... We’ve narrowed it down to some very highly qualified candidates ... I should probably under-promise here, but I believe you’ll be hearing from the new CEO on this call next quarter.”
Disclosure: I’ve owned a Peloton for a couple of years, riding under the extraordinarily clever handle “WheeliamShatner” alongside my partner. While I’m not the typical Peloton enthusiast—the classes don’t quite grab me, and the “high-fives” feel more distracting than motivating—my partner is fully immersed in the community. This dual perspective offers a unique vantage point. I’ve experienced the product, engaged with the members, and closely followed the industry, giving me a clear lens on what truly matters—especially when it comes to innovation and how Peloton can better engage members like me (who, we suspect, skew male).
All figures are in USD, and all years refer to Peloton’s fiscal calendar unless otherwise noted. Some quotes may be lightly edited for clarity and flow.
History
In 2011, John Foley, a seasoned business executive and fitness enthusiast, found himself in a cycling class in Manhattan—ground zero for the boutique fitness craze. Just like in San Francisco, Los Angeles, and Seattle, high-end studios like Orangetheory and Barry’s Bootcamp were springing up everywhere, offering the latest must-have experience for the urban, smoothie-drinking, athleisure-clad crowd.
“… That’s where you want to be if you are an up-and-coming instructor in this burgeoning new category … there are so many great instructors at these places that have cult followings … it’s so hard to get spots in those classes. The instant they become available, you even had to do this in Seattle, I remember, but in New York it’s impossible.”
- David Rosenthal, the Acquired podcast
This experience sparked Foley’s game-changing idea: a connected stationary bike that would bring live studio classes directly into people’s homes. The value was clear—no need to live in a boutique hub like NYC to access top-tier instructors, no more scrambling for class slots, no steep per-ride fees, and—most appealing of all—class sizes that didn’t cap at 50. Unlike SoulCycle, there would always be room for one more.
But big ideas come with big risks, and investors weren’t exactly clamoring to buy in. Undeterred, Foley turned to friends and family, raising $400,000 through $25,000 and $50,000 checks at a $2 million post-money valuation. Capital may have been tight, but talent was easier to come by—Foley successfully convinced four co-founders to join him on the ambitious journey.
The team knew the bike couldn’t just be functional; it had to look good enough to earn a place in living rooms, bedrooms, or even offices—after all, most of the boutique crowd didn’t have home gyms. Over the next 18 months, they poured their efforts into prototyping what they envisioned as “the most beautiful bike ever designed.”
“There were a number of things we quickly realized we could improve on,” said Tom Cortese, Peloton co-founder. “For starters, bikes today are loud and clunky, so we threw out the chain. We replaced it with a belt drive—smooth, super quiet. You can ride at home without bothering anyone. We also got rid of the brake pads—it’s all magnets now, passing around the flywheel. It’s awesome.”
The search for their first instructors kicked off in May 2013, with the following ad:
In the summer of 2013, Peloton launched a Kickstarter campaign, setting the price of its bike at $1,500 and aiming to raise $250,000. They exceeded their goal, raising $307,000 from 297 backers. But the outcome wasn’t quite the home run they had hoped for.
“We launched a website at pelotoncycle.com and did some marketing on Facebook, but it was mostly crickets. We’d sell about five bikes a week,” Foley recalled. It became painfully clear that people needed to see and experience the product in person. That realization led to their first store opening at New Jersey’s Short Hills Mall in November 2013.
The success of that first store spurred them to open more in 2014, hire additional instructors, and run their first commercial. With the network effect kicking in, Peloton generated $10 million in revenue that year and secured its first institutional funding round, led by Tiger Global.
Momentum continued to build. By 2015, sales skyrocketed to $60 million, and in 2016, that number nearly tripled to $170 million. Peloton officially joined the unicorn club in 2017, raising $325 million at a $1.3 billion valuation. Then, in August 2019, Peloton filed its S-1 with the SEC.
When “PTON” debuted on the NASDAQ a month later, it ranked as the third-worst “mega-IPO” since the financial crisis. Still, this wasn’t exactly a flop—Peloton raised $1.16 billion at $29 per share, reaching the upper end of its target range. And then, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic.
Within six weeks, over 1.1 million people had downloaded Peloton’s app, and Q4 revenue surged 170% Y/Y. Demand for bikes and Treads soared to the point where customers faced months-long waits, and some resold their equipment at hefty markups. Peloton quickly became one of 2020’s standout stay-at-home stocks—a “pandemic darling.”
“COVID was the marketing campaign that Peloton never could have afforded. The growth that happened during COVID propelled the business to scale in a way that no other company has achieved. That afforded access to capital that it wouldn’t otherwise have and made it the dominant player in the connected fitness category.”
– McCarthy, from a December 2022 interview
As vaccines rolled out in late 2020 and gyms began to reopen, questions loomed about Peloton’s post-pandemic future. The stock peaked soon after, but Foley’s confidence never faltered. In February 2021, he boldly predicted, “We will continue to be a high- or hyper-growth company for years and years to come … you have to think about how you make millions of treadmills a year, three or four years from now … but not getting over your skis with fixed costs and overhead.”
Yet Peloton had already done just that. By early 2021, the company had increased manufacturing capacity by over 700% Y/Y, while also pouring money into retail showrooms, warehouses, last-mile delivery fleets, and a workforce that swelled from 2,000 employees in 2019 to over 8,500 in just two years.
“There is but one step between the sublime and the ridiculous,” Napoleon famously remarked during his retreat from Russia in 1812. Peloton’s own retreat from its pandemic highs echoes that sentiment. The cost of these largely self-inflicted missteps—restructuring, impairments, recalls, and litigation—topped $2 billion. Under increasing shareholder pressure, CEO John Foley stepped down in February 2022.
Enter Barry McCarthy, a no-nonsense operator with a sharp, analytical mind, best known for steering Netflix and Spotify through periods of rapid growth as CFO. As CNBC’s Gabrielle Fonrouge put it, “employees breathed a sigh of relief to have what felt like an adult in the room, someone who’d be able to clean up a multibillion-dollar mess.”
McCarthy summed up Peloton’s leadership failures by contrasting them with his former colleagues. “What makes Reed Hastings and Daniel Ek such great executives is that they deal with the world as it is, not as they want it to be … The Peloton team didn’t exhibit that capacity, right, to imagine that COVID was going to be the new normal.”
Operationally, the company was in disarray. The order management system, built on outdated code, caused headaches across departments, particularly in accounting and customer service, where employees had to navigate up to 16 different screens just to access a customer’s history. Engineers, too, were hamstrung, unable to push updates or efficiently run A/B tests. “We have to wait until the end of June to A/B test something that would take 1.5 days at Netflix,” McCarthy lamented.
To right the ship, McCarthy transitioned Peloton to a variable cost model, exiting in-house manufacturing, outsourcing logistics, scaling back retail, partnering with Dick’s and Amazon, and launching a bike rental program (primarily) to clear excess inventory.
“If you look at our balance sheet, you’ll see that the business is not going away, which for a long time was a systemic threat. So, because of that, we’re able to focus on renewed growth … I think you’re going to see significant product innovation in the next two years, which I’m very excited about because we have a real shot at changing the growth trajectory of the business.”
- McCarthy, Q2 2024.
Overview and Business Model
Peloton closed 2024 with 6.4 million members spread across 3.6 million paid subscriptions, including 2.98 million Connected Fitness (CF) and 615,000 digital app subscriptions. A “member” is defined as anyone with access to a paid account who completed at least one workout in the past year. Notably, around 10% of CF subscribers own more than one Peloton product—a clear sign of the brand’s appeal.
While Peloton is making moves into commercial spaces like hotels and campus gyms (we’ll touch on that later), over 90% of its CF subscriptions are held by households. Members are highly engaged, averaging 14 workouts per month per CF subscription in 2024.
Peloton currently operates in five key markets, with the U.S. accounting for about 90% of its revenue, followed by the U.K., Canada, Germany, and Australia. Its distribution strategy combines direct sales with third-party (3P) retail and logistics channels. However, in Austria (and soon Germany), it relies exclusively on 3P partners.
Roughly two-thirds of Peloton’s lifetime sales have come from hardware, with bikes making up about 90% of the units sold. Beyond its flagship products, Peloton offers the Guide, a personal training device, as well as a range of accessories and apparel.
Hardware
Peloton’s hardware pricing, including delivery and setup, ranges from $1,445 to $2,495 for the Bike and Bike+, $2,995 for the Tread, $3,295 for the Row, and $6,000 for the Tread+. The pricing is competitive within their category tiers, though Peloton offers fewer models compared to rivals like NordicTrack, which has eight treadmills to Peloton’s two, and Hydrow, which offers three rowers to Peloton’s one.
To paint with broad strokes, Peloton’s hardware stands out with its sleek, minimalist design, whisper-quiet operation, and premium materials like soft-touch coatings and carbon steel—while many competitors rely on lower-grade plastics and standard finishes.
Peloton also excels with its industry-leading software and user-friendly interface, but it’s the content that drives its high Net Promoter Scores (NPS) and fosters deep customer loyalty.
The Tread+ is not currently available outside of the U.S., and the Row is only available in Canada outside its home market.
Content
Peloton streams over 1,000 live classes each month, across 16 modalities in English, German, and Spanish. Its cutting-edge studios in Hudson Yards, NYC, and Covent Garden, London—both located in prime, affluent areas—offer distinct advantages despite their significant costs.
The cycling studios are the largest, with 39 bikes in NYC and 24 in London. Nestled in two of the world’s most visited cities, they’ve become pilgrimage sites for many Peloton members when traveling. Classes, priced at around $35 per session, fill up very quickly.
This intense demand highlights members’ enthusiasm, especially when they have the chance to meet their favorite instructor—a moment that often leaves them starstruck. It’s more than just fan service; it’s a well-oiled loyalty engine that reinforces Peloton’s unique place in the fitness world.
Unsurprisingly, the energy in these classes is palpable, even for those tuning in remotely. Features like Peloton’s leaderboard and social tools—like high-fiving fellow riders—amplify the sense of community. But what truly sets Peloton apart is its seamless integration of music, powered by the company’s proprietary platform.
Music, as it turns out, is no small matter. Delivering this perfectly synchronized experience requires securing public performance, reproduction, and synchronization rights—unlike radio stations, which only require performance rights. The result? A finely tuned experience where, when an instructor calls out “Right, right,” your foot instinctively follows the beat, pulling you deeper into the workout. In 2024, Peloton spent $137 million on music royalties, accounting for 25% of its subscription cost of revenue.
Instructors, with the help of music experts, curate playlists for each class, and members often choose sessions based on the music selection. In contrast, many other platforms rely on unsynchronized background tracks—if they even offer music at all—and typically have limited in-studio class sizes, if any. To fully grasp these advantages, take a look at these clips comparing Peloton with its main rival, iFIT, where the differences are striking.
In recent years, Peloton has leaned heavily into non-cycling content, particularly strength training—the most popular form of at-home exercise in the U.S.
Peloton’s focus on high production value, diverse content, and expanding entertainment options1 has resulted in a 75% increase in monthly workouts per CF subscription since 2018.
Subscriptions
Peloton offers three subscription tiers: the All-Access Membership for hardware users at $44 per month, and two digital options—App One at $13 and App+ at $24. The key difference between the digital tiers is that App One limits access to equipment-based classes, while App+ offers unlimited access to all classes, including performance metrics. The company also partners with employers, insurers, and other enterprise clients to subsidize access to both the Peloton App and All-Access Membership for employees and members.
Retention
In 2024, the average net monthly churn rate for CF subscriptions was 1.4%, compared to approximately 5% for rentals and 7.7% for paid app subscriptions. The CF churn rate has risen above the five-year average, primarily due to a revenue shift toward higher-churn segments, particularly secondary market subscribers.
Secondary market subscribers show slightly higher churn rates than those acquired directly. As this segment has grown, so has overall CF churn. In response, Peloton has introduced new initiatives aimed at improving the buying and onboarding experience for these users.2
Higher churn has also been observed among cohorts acquired after the initial COVID boom, when Peloton started aggressively targeting non-core demographics, particularly Gen Y and Gen Z—a strategy now seen internally as a misstep and subsequently scaled back.
Competitive Landscape
Peloton faces competition from fitness apps, mid-tier and higher-end gyms, boutique fitness studios, and other connected fitness providers. Recall iFIT, its main rival and the parent company of brands like NordicTrack, ProForm, Weider, and Freemotion, which has long been a key player in the industry.
iFIT offers a broader range of equipment, from entry-level to premium, and maintains a stronger foothold in the commercial market, while Peloton has remained primarily consumer-focused. The sharpest divergence, however, is in their subscription businesses—where iFIT has faltered despite the bold projections in its since-withdrawn 2021 S-1 filing.
At the time, iFIT’s engagement was half of Peloton’s, with a churn rate more than double. Yet, iFIT touted its connected fitness platform as “unmatched” and predicted significant market share growth. The reality has been quite different: since March 2021, Peloton has added approximately one million net connected fitness subscriptions and doubled its revenue, while iFIT has lost around 500,000 subscriptions. This pattern extends to other competitors like Bowflex and Echelon.3 Despite steady hardware sales, neither has cracked the subscription model.
Barry McCarthy understood early on that success in hardware was secondary to winning in content and shifted Peloton’s focus accordingly. As he put it in May 2023:
“So, do I want to sell hardware? Or do I want people engaged in the content? I want people engaged in the content. If you want to consume it on our platform, that’ll be a terrific experience. But if you bought somebody else’s hardware, we’d still be delighted to have you.” He added, “If you can afford a Mercedes, great—we’ll take a Mercedes. But if all you can afford is a Ford, then we'd be delighted to sell you a piece of the Magic Kingdom.”
And Peloton has indeed sold thousands of those “pieces of the Magic Kingdom” to users of competitor hardware. Indeed, there’s even a Facebook group called “Peloton Digital App users + Echelon Bike Riders” with over 11,000 members.
What’s Next for Connected Fitness?
Peloton wasn’t the only company to overextend during the pandemic-fueled home fitness boom. Capital flowed into connected fitness like the next gold rush, but the surge was followed by an inevitable correction. Since 2019, Peloton’s main competitors—iFIT, Hydrow, Echelon, and Tonal—raised over $1.5 billion collectively. Yet, as the dust settled, the sector found itself grappling with financial instability and rounds of layoffs. Bowflex, for instance, filed for bankruptcy in May 2024.
With capital drying up, these competitors are likely to lose ground as the industry consolidates. As rivals tighten their belts and cut spending—particularly on high-cost advertising targeting Peloton’s core demographics—Peloton stands to benefit. Less competition for premium ad placements means lower CPMs, making it easier and cheaper for Peloton to reach its most lucrative prospects.
Additionally, it seems inevitable that competitors will pivot toward more open ecosystems—a trend already in motion—allowing seamless integration with third-party apps like Peloton. This shift will be crucial for driving hardware sales, which remain the backbone of their revenue.
Digital App
Peloton’s real competition on the digital side comes from tech giants like Apple (Fitness+) and Google (Fitbit), but as we've seen in streaming, deep pockets don't always guarantee success—just look at Apple TV and Amazon Prime next to Netflix. Apple has been producing fitness content for years, and while it’s decent, it’s not in the same league as Peloton’s. The same holds true for Fitbit. As one former Peloton VP of Content Production bluntly put it: “I know what Apple spends on their content. I know what Peloton spends on theirs. It’s clear which one is really making it.”
Peloton’s content engine, fueled by millions of engaged members, has created a virtuous cycle: top talent flocks to the platform, eager to build their personal brands and land licensing deals. But as Apple Fitness demonstrates, it’s not just about audience size—it’s about the power of the Peloton brand and the doors it opens.
Of course, this begs the question: what happens if Peloton’s star instructors jump ship to Apple Fitness or another competitor? The so-called “instructor exodus,” where three instructors left amid contract talks, did raise eyebrows. But with 59 world-class instructors on board, losing a few is hardly a crisis. Peloton’s connected model, where members invest in expensive equipment and belong to a tight-knit community, adds a protective buffer. When one instructor exited and criticized Peloton, it quickly became clear where members’ loyalties lay—and the content disappeared from the platform.
These dynamics explain Peloton’s dominance in app store rankings and its digital growth potential. But this confidence wasn’t always there. Before its 2023 relaunch, the app wasn’t exactly making waves. Leaked communications from January 2022 revealed one executive’s blunt take: “Our app is terrible.”
Still, Peloton’s app suffers from low awareness—just 6%, compared to over 55% for the Bike. That disparity signals a huge growth opportunity. As McCarthy noted in Q2, “The app is the best product we have that nobody knows about.”
Community
While Peloton’s missteps and controversies have certainly left a mark—though often overstated—it has achieved something few others have: building and sustaining a fiercely loyal, engaged community. This is evident in the presence of at least three podcasts solely dedicated to Peloton, each consistently producing content for several years.
It’s no surprise that Peloton was featured on the popular podcast Sounds Like A Cult in 2023. The hosts, while making playful comparisons to actual cults, noted: “… [Peloton] doesn’t require you to recruit anyone, but you just want to … Once you get hooked, you’re going to want to evangelize it to all your friends … you want them to join because it’s something that changed your life for the better…”
A powerful example of this community spirit was on full display when Peloton Tread instructor Susie Chan participated in the Badwater 135 Ultramarathon, considered the world’s toughest race. A group of Peloton members, known as "Susie’s Striders," organized a relay challenge to support her, ensuring that at least one member was running—on their Tread or outdoors—for the entire 41-plus hours it took her to finish the race. Some even woke up at 2 or 3 a.m. to make it happen.
Few brands have cultivated such dedicated communities around them.
Member Profile and Value Proposition
So, who is Peloton for? Primarily, it’s for people who want to stay fit without the hassle of going to the gym. While some users might still frequent a gym or boutique fitness studio, they’re likely in the minority. Peloton’s core demographic skews toward middle-aged, upper-middle-class or higher-income households—people less concerned with subscription costs and more interested in avoiding the typical gym scene, especially the younger, more boisterous crowd (no offense, gym bros!).
The membership also leans heavily female, a group generally more drawn to group fitness classes.
For many, owning a Peloton marks the first time they’ve maintained a consistent fitness routine. The reasons are clear: convenience, privacy, top-tier instructors, and the commitment that comes with a sizable financial investment. At the core of Peloton’s value proposition is convenience—eliminating the hassle of commuting to the gym, especially during winter or when juggling kids, a demanding job, or both.
Then there’s the economics. Members view Peloton as a long-term investment, and when spread over several years, the cost often compares favorably to popular alternatives. High-end gym memberships, like Equinox, typically range from $70 to $150+ per month. Boutique fitness classes can run $20 to $40+ per session, and personal trainers command $50 to $150+ per hour. While Peloton isn’t a direct substitute for these, it offers a highly practical, cost-effective alternative—and, at its price point, arguably the best option available.
Financial Snapshot and Unit Economics
Peloton’s revenue peaked in 2021 at $4.02 billion, driven by $3.15 billion (78%) from hardware sales. In 2022, operating losses reached a whopping $2.73 billion. Since then, the company’s revenue mix has shifted, with subscriptions overtaking hardware sales for the first time in 2023. Gross margins for these segments have moved in opposite directions.
Restructuring efforts have primarily targeted COGS, alongside significant cuts in S&M and G&A (see 2024 vs. 2022). Peloton expects to wrap up the remainder of its ~$200 million restructuring plan this quarter, which includes ~$100 million in headcount reductions and ~$50 million in S&M cuts.
In May 2024, Peloton completed a major refinancing, securing a $1 billion five-year term loan and $350 million in oversubscribed convertible senior notes due 2029, with interest rates of 12.4% and 5.5%, respectively. Proceeds from the notes and new credit facilities, along with cash on hand, were used to repurchase $800 million of 0% convertible senior notes due in 2026 at a discount (~$200 million remains outstanding) and refinance its term loan and revolving credit facilities.
As expected, Peloton’s financial struggles have led to a hefty accumulation of NOLs, totaling $3.3 billion at the federal level and $2.6 billion at the state level.
In 2024, hardware gross margins improved notably, with Peloton now targeting low double-digit margins, according to CFO Liz Coddington. This is expected to be driven by reduced promotions, supply chain efficiencies, and a more favorable revenue mix, especially with a stronger focus on Treads. The company also doesn’t expect the inventory write-offs that weighed it down in the past.
Peloton turned Adjusted EBITDA positive for the first time in three years and posted positive FCF in the last two quarters. While encouraging, stock-based compensation expense (SBCE) remains a drag, still well above the five-year per-employee average.
Looking ahead, SBCE is likely to align more closely with the annualized value of USBC, barring any significant workforce expansion.
It’s worth noting that Peloton could reduce its marketing from 25% of sales to 10% and its R&D from 11% to 5%, and it would still outspend the next highest competitor, according to BMO. While such drastic cuts are unlikely, the key takeaway is that Peloton has plenty of room to scale back spending without jeopardizing its market position.
LTV to CAC
Like all subscription-based businesses, Peloton’s success hinges on its LTV to CAC ratio (Lifetime Value to Customer Acquisition Cost). Peloton defines LTV as the present value of the expected gross profit generated by a customer. While the company aims for a 2-3x ratio, it has hovered around 1 to 1.5x in recent years.
Peloton’s unit economics are less favorable for rentals than for equipment sales, due in part to more demanding working capital requirements. However, the rental program has demonstrated strong incremental value, with over 60% of subscribers stating they wouldn’t have signed up without it. Rental economics are more favorable for higher-priced hardware, especially when buyout rates increase and refurbished inventory is used (primarily from 30-day trial returns).
Total Addressable Market (TAM)
Before we dive into Peloton’s growth prospects, let’s quantify the opportunity. Global health and wellness spending surged to $5.6 trillion in 2022, up from $4.2 trillion in 2017, according to the Global Wellness Institute (GWI). That figure is projected to reach $8.5 trillion by 2027, with the physical activity sector growing at around a 7% compound annual rate.
The pandemic, unsurprisingly, accelerated health awareness way above trend, with fitness app usage soaring 50% above pre-pandemic levels by mid-2020. This heightened focus hasn’t waned—58% of U.S. respondents in a 2024 McKinsey survey said they’re prioritizing wellness more than they did a year ago.
The fitness sector is also booming. U.S. gym memberships hit an all-time high of 69 million in 2022, up from 64.2 million in 2019. Meanwhile, over 30% of Americans now use health-tracking devices, and Amazon saw a 25-55% spike in sales of supplements and alcohol-free beverages in 2023.4 In short, the health and wellness sector isn’t just growing—it’s thriving.
Peloton estimated that over five million treadmills and nearly three million stationary bikes were purchased for home use across its core markets in the year ending March 2019. As expected, most of these sales came from entry- and mid-level price points. For example, Jungle Scout data shows that in the three months ending July 2024, sales of treadmills priced between $1,000 and $2,000 on Amazon were more than four times higher than those above $2,000. This is why, after introducing the smaller Tread (priced at $3,000, half the cost of the Tread+), management saw the treadmill category as a 2-3x opportunity compared to the bike.
As mentioned earlier, Peloton’s unaided brand awareness lags significantly in international markets—37% in the U.K. and somewhere in the 20s in Germany. The awareness gap between Peloton’s bike and non-bike products is likely just as wide abroad as it is in the U.S., leaving ample room for growth across both product lines and geographies.
However, the digital app (soon to be “apps”) could be the real linchpin for Peloton’s expansion. It offers an asset-light way to deepen market penetration and reach new regions, while efficiently drawing more users into Peloton’s ecosystem. Customers who start with the app are far more likely to choose Peloton hardware when they’re ready to upgrade or make their first purchase, making it a powerful conversion tool.
“You’re going to be surprised how much TAM was unlocked by the digital app,” McCarthy said in 2023.
The Next Chapter: Growth and Improvement Opportunities
“It’s pretty clear that innovation drives growth. We’ve been busy saving ourselves the last two years but now we’re positioned to invest in innovation. Again, it’s innovation that put us on the map in the first place. There’s a lot of talent in the building. It’s a matter of getting it organized and focused in a really productive way.”
– McCarthy, Q2 2024
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