2 Reasons I Haven't Bought Peloton Interactive, and Don't Plan on Doing So...Ever

There's no denying Peloton Interactive (NASDAQ: PTON) is the premier, premium name in interactive fitness. It practically pioneered the industry, in fact, when it introduced its very first connected exercise equipment back in 2012. It's also arguably kept the business' bar high ever since, growing itself into the $1.6 billion outfit it is today that did $2.5 billion worth of business last fiscal year. It even swung back to a profit in the final quarter of that year (ending in June).

Nevertheless, I still have a couple of major philosophical problems with this company's business, neither of which is its continued struggle to remain out of the red and in the black.

Image source: Getty Images.

2 inescapable problems

Don't misunderstand. Peloton Interactive may well become and remain fiscally viable one day, rewarding patient shareholders as a result.

From a risk-versus-reward perspective, however, I still believe there's too much of the former and not enough the latter.

But first things first.

Peloton Interactive's business model is two-pronged. It obviously makes exercise bikes, treadmills, and rowing machines. It also sells access to online, instructor-led classes, which is the bigger and higher-margin breadwinner of its two ventures, accounting for over 90% of last year's gross profit. Of course, the physical and digital products work hand in hand. From that perspective, it's actually a pretty brilliant business model, not unlike the one that Apple created around its premium-priced iPhone.

This model's got two glaring flaws, however.

The first of these is a lack of a moat defending its place in the market. Sure, the name "Peloton" is trademarked, and some elements of its equipment and apps are copyrighted and/or patented. The premise of its entire business is easy to replicate though and it has been. Nautilus, iFIT, Echelon, and Technogym each offer some sort of interactive fitness equipment that would be a perfectly acceptable -- and more affordable -- alternative to Peloton-made options.

The other stumbling block is the nature of the fitness industry itself. At best, it's highly cyclical. At worst, it's just not all that sticky, meaning consumers aren't interested in remaining paying subscribers to a service they're very likely to stop using.

And all of Peloton's key metrics have confirmed these challenges. Late 2022's pandemic-prompted membership peak of 7 million people has steadily dwindled to last quarter's 5.8 million, corresponding with comparable declines in total connected fitness subscriptions, app subscriptions, and most notably, total revenue. Last fiscal year's top line of $2.5 billion extends a pullback from fiscal 2021's peak of just over $4.0 billion. Analysts are calling for another slight sales decline for the fiscal year ending in June.

A turnaround-inducing fix is unlikely

It's understandably frustrating to shareholders who have and still do expect big things from this company. Like the aforementioned Apple, Peloton Interactive makes the best overall product in the business. The problem is simply the business itself -- neither consumers nor gyms need or want to pay a premium price for this company's offerings when a lower-cost alternative will suffice. And that's a problem for investors because there are plenty lower-cost alternatives available.

Never say never. But, it seems unlikely there's ever going to be a game-changing solution to put in place here. Shareholders best bet from this point is that a bigger technology outfit will acquire Peloton, mostly for its brand name. Even that seems like bit of a long shot though, given how crowded the fitness equipment market is.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Peloton Interactive and is short shares of Apple. The Motley Fool has a disclosure policy.