November 28, 2020
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Peloton Needs a Breather

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The pandemic has been good for Peloton, sending the company well-heeled customers suddenly locked out of their gyms.

The pandemic has been good for Peloton, sending the company well-heeled customers suddenly locked out of their gyms.

Photo: Ezra Shaw/Getty Images

The problems of
Peloton
may be high-quality ones these days, but they are real problems nonetheless.

The connected-fitness company’s stellar results for the September quarter were also a testament to what could have been. Revenue more than tripled year over year to about $758 million as demand remained hot for the company’s spin bikes, treadmills and online-fitness classes. But with wait times to receive shipments of Peloton’s gear now stretching between one and three months, reported revenue is now a lagging indicator: The company doesn’t recognize revenue until the product is delivered. Supply constraints will continue to factor into the current period ending in December—which Peloton has projected as its first billion-dollar-revenue quarter.

The pandemic has been undeniably good for Peloton, sending the company a rush of well-heeled customers suddenly locked out of their gyms. And with growing signs of a new wave coming over the fall and winter, it’s a dynamic that won’t be short-lived. Peloton is confident enough to project ending its current fiscal year next June with 2.17 million subscribers to its connected-fitness services. That will require the company to average over 250,000 new additions per quarter—more than double its average before the pandemic’s onset.

The main impediment to hitting that number may be a growing slate of competitors trying to take advantage of Peloton’s long wait times. So the company is understandably hustling to get its manufacturing ramped up and solve other logistical hurdles. Peloton even noted on its conference call Thursday that it is now starting to ship its popular new Bike+ product by air from Taiwan. Moves like that will help assuage frustrated customers, but they come at a cost. Peloton projected gross margins for its product side to hit 35% in the December quarter—a record low for a segment that has typically averaged around 42%.

That hit will likely be temporary. Even before Covid-19, Peloton had successfully answered skeptics by proving the existence of a strong market for high-end fitness gear with a recurring revenue model. And the pandemic’s duration makes it likely that many of those customers will stick with the service rather than rushing back to the gym—face masks and Purell in hand. But Peloton’s stock price has more than quadrupled this year, well exceeding even other pandemic-fueled names such as
Shopify
and
Etsy.
That leaves no room for error, even for a company able to sell every $2,500 exercise bike it can make.

Write to Dan Gallagher at dan.gallagher@wsj.com

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