Exercise-bike startup Peloton filed for IPO and revealed a long list of risk factors that investors should know
- Buzzy indoor fitness startup Peloton filed for its initial public offering on Tuesday.
- In its S-1 filing, the company laid out a series of "Risk Factors" - a list of the potential issues that will face as it grows and becomes a public company.
- In these, it addresses the increasingly saturated fitness market, growing competition, and a management team that has limited experience running a public company.
- Here are the key issues it could face.
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Buzzy New York high-tech fitness company Peloton filed for its initial public offering on Tuesday.
To begin that process, it had to publicly disclose a trove of information about itself that was previously rumored or outright unknown in an S-1 filing.
In a section labeled "Risk Factors," Peloton detailed the major issues that it believes it could face. Here are some of the biggest issues:
Its losses are spiraling and could get worse
Peloton saw its losses nearly quadruple over the course of a single fiscal year, from a $47.9 million net loss in 2018 to a $245.7 million net loss in fiscal 2019 and according to the filing, this could only get worse:
- "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."
- "We will incur additional legal, accounting, and other expenses that we did not incur as a private company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that we will be able to increase our revenue to offset our operating expenses."
And if its revenue does not grow at a greater rate than its operating expenses, it will not be able to achieve and maintain profitability, it said.
The fitness market is becoming increasingly saturated
The fitness and wellness market has become increasingly saturated. Peloton not only has direct competitors in the indoor cycling industry, such as Flywheel and SoulCycle, but also contends with every gym and boutique fitness concept, and the great outdoors.
- "We face significant competition in every aspect of our business, including at-home fitness equipment and content, fitness clubs, in-studio fitness classes, and health and wellness apps."
- "We expect the competition in our market to intensify in the future."
- "If our market... becomes saturated with competitors, or if our products and services do not achieve market acceptance, our business, financial condition, and operating results could be adversely affected."
And if it doesn't keep up with trends or if competitors introduce similar offerings faster, it's likely to lose out.
Home fitness is still a new concept and there's no guarantee it will take off
The connected home fitness market is still new and "largely unproven," the filing said, and it's unclear as to whether it will sustain high levels of demand or become the workout of choice for many people:
- "If it does not continue to grow, grows more slowly than we expect, or fails to grow as large as we expect, our business, financial condition, and operating results may be adversely affected."
Moreover, educating consumers on these new products and services requires "significant" investment, it said.
Peloton's business is affected by seasonality
Peloton's numbers show that business has historically boomed at the back end of the year when the cold weather kicks in in the northern hemisphere and customers are making New Year's resolutions to get fit.
It brings in a "disproportionate" amount of sales between November and February, the filing said. In fiscal 2017, 2018, and 2019, for example, it generated over 60% of its full-year revenue during the second and third quarters.
But this brings its own risks. If adverse events occur during these months, for example, it could have a disproportionate effect on its operating results for the entire year, the filing said.
Sales of its buzzy $2,000 bike are likely to slow as the company matures
Peloton is expecting the excitement around and rapid sales growth of its core product, the $2,000 connected fitness bike, to cool as the company matures.
"We have experienced periods of high revenue growth since we began selling our Bike that we do not expect to continue as our business matures," the filing said.
And because the company derives a "significant majority" of its revenue from sales of its bike, any material decline in sales would have a "pronounced impact on our future revenue and operating results," it said.
It relies on a limited pool of manufacturers
Peloton relies on a small group of manufacturers whose primary facilities are located in Taiwan to produce its machines.
Its reliance on these manufacturers puts it at risk especially as it doesn't currently have backup suppliers in place. Finding new suppliers is complex and there's no guarantee that it would be able to do so without incurring extra costs and delays, it said.
The US-China trade war uncertainty looms
The company is already being impacted by the US' trade war with China where it sources parts for its machines. Depending on the outcome of current trade negotiations, these could have a greater impact, it said, and ultimately affect its margins.
There's no guarantee that it will be able to license the music that it plays in its classes
Music is an important part of Peloton's workout classes but thanks to the complexities of licensing, there's no guarantee that it will be able to play exactly what it wants.
"We cannot compel third parties to license their music to us," it said in the filing. "And our business may be adversely affected if our access to music is limited."
It continued: "Given the high level of content concentration in the music industry, the market power of a few licensors, and the lack of transparent ownership information for compositions, we may be unable to license a large amount of music or the music of certain popular artists, and our business, financial condition, and operating results could be materially harmed."
Peloton also said that due to the complexity of licensing agreements, it couldn't be sure it wasn't "infringing or violating any third-party intellectual property rights" with the music already on its service.
The management team doesn't have much experience running a public company
Most of Peloton's management team has limited experience running a public company, according to the S-1.
And the new responsibility of answering to shareholders and complying with the increasingly complex laws that a public company has to follow could "divert" the attention of senior leadership from the day-to-day running of the business and negatively impact it, it said.
Going public also puts the company culture at risk
The entire company culture could also be at risk as the company grows and develops its infrastructure to support it going public:
- "We believe that a critical component of our success has been our corporate culture. We have invested substantial time and resources in building our "One Peloton" culture, which is based on the idea that if we work together, we will be more efficient and perform better because of one another."
- "Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives."