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Why Peloton will be an explosive stock after the fitness startup goes public

Brian Sozzi
Editor-at-Large

Peloton isn’t even public yet and the bear case on the stock is already well formed.

But the negativity may be way overblown.

The maker of $2,000 streaming exercise bikes (and $4,000 treadmills) filed its S-1 this week as it nears an initial public offering soon. Do a few reads of the digital document and you can see what has the Peloton bears saying this is another Uber IPO in the making (dreadful).

Peloton hauled in $915.9 million in sales for the fiscal year ended June 30. But it lost a whopping $202 million as it ramped up marketing costs to attract new users. The company is also building out showrooms for its products around the world and expanding its team. All of that comes at a cost — so much so that Peloton acknowledges in the filing it may never turn a profit.

The steep loss in the fiscal year arrives despite Peloton seeing impressive 108% growth in the number of subscribers to its digitally-connected fitness products. The number of subscribers has increased five-fold since fiscal 2017. And remember, Peloton is essentially selling luxury products to a well-to-do class of fitness freaks... yet still no profits.

Further fodder for the bears: Peloton will go public with a dual class voting structure, meaning out-sized power will be in the hands of management. This voting structure has been frowned on by Wall Street time and time again with IPOs.

“I wanted to be excited about this IPO,” said John Meyer, managing partner at Starship Capital on Yahoo Finance’s The First Trade. Ultimately, Meyer isn’t excited about the Peloton IPO.

He quickly ticks through the key planks in the bear thesis: the products are priced too high; the company continues to lose money; competition is fierce among physical gyms such as SoulCycle and similar technologies out of rivals like NordicTrack.

Peloton’s business model is proven

LAS VEGAS, NV - JANUARY 11: Maggie Lu is reflected in a touch screen as she demonstrates how to select a class on a Peloton Tread treadmill during CES 2018 at the Las Vegas Convention Center on January 11, 2018 in Las Vegas, Nevada. The USD 3,995 workout machine is expected to be available later this year and features a 32-inch touch screen that connects users to instructors giving live or on-demand fitness classes. CES, the world's largest annual consumer technology trade show, runs through January 12 and features about 3,900 exhibitors showing off their latest products and services to more than 170,000 attendees. (Photo by Ethan Miller/Getty Images)

But folks, Peloton isn’t Uber (UBER) or Lyft (LYFT) with an insanely unproven business that puts the prospects of profits well off into the future. It’s not locked in some kind of ride-hailing industry price war — by all accounts, Peloton’s bikes are holding their premium prices and doing so to a nice degree in the aftermarket (if you can even find a used one for sale).

Peloton is a mishmash of Apple (AAPL), Netflix (NFLX) and Planet Fitness (PLNT). That’s a good place to be.

The company has led with design and function just like Apple. In turn, that has helped them cultivate a very loyal ecosystem that is willing to pay $39 a month (at a minimum) to be part of larger social community. The company’s Netflix-like recurring revenue should be applauded, not vilified as being at risk as somehow on the verge of falling apart.

So, what if Peloton only sells to those with money? Since when is it a bad thing to have a bunch of rich people obsessed with your product and service? These are the folks that will spread the word at no cost and stay engaged with new products and services.

These are also the people that will help attract more middle-income fitness freaks.

And above all else, Peloton plays into the strong and healthier living movement sweeping the world. That movement is one of the main reasons Planet Fitness shares have surged 300% since its 2015 IPO.

What, people will suddenly want to go back to being obese and boom, down goes Peloton’s business model? Of course not — this trend will only accelerate in the decades to come. And Peloton will be there to capitalize in the U.S. and abroad, the latter in which it has only scratched the surface via an entry into Germany.

These are but a few of the factors that set the stage for Peloton to silence its critics on Wall Street when it eventually IPOs. Why? Because they are very, very likely to make money in your lifetime — the verdict is out on that front on Uber and Lyft.