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Another IPO Treads Water as Peloton (PTON) Shares Fall in Market Debut

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Peloton made its market debut this week, opening on the NASDAQ at $27, which was below its IPO pricing of $29 per share. The firm’s shares closed down over 11% on its first day of trading, giving it a market cap of $7.2 billion. Shares are down roughly 4.3% in morning trading Friday.

The digital fitness company’s less than spectacular IPO comes after many private market “unicorns” struggled in their debut. Unicorn companies have a deal or offering size of more than $1 billion. The digital fitness company is trying to adapt traditional workouts with the modern-day digital world. Will they bounce back from this shaky start or will they suffer the same prolonged losses that other 2019 unicorn firms have experienced?

Tough Year for Unicorns

Just this week,  We Work had to postpone their potential IPO after their biggest investor, SoftBank (SFTBY - Free Report) , lobbied for CEO Adam Neumann to resign after speculation arose about the company’s corporate governance. Other unicorn startups like online pet supply retailer Chewy (CHWY - Free Report) and team communication tool Slack (WORK - Free Report) have struggled since their IPOs; the stocks are down 25.6% and 41.9%, respectively. Earlier this month, online dentistry company Smile Direct Club (SDC - Free Report) sunk 28% in its first day on Wall Street, making it the worst market debut for a unicorn startup this year.

Investors have been wary of diving into unicorn startups this year as issues with things from company fundamentals to corporate governance have all been headwinds for these young companies looking to make their mark on Wall Street. Ride sharing companies Uber (UBER - Free Report) and Lyft (LYFT - Free Report) have both also fallen significantly since their IPO.

Kathleen Smith, who manages IPO-focused exchange-traded funds for Renaissance Capital, stated, ″Investors are taking recent losses in IPOs — and investors are fleeing for safety in larger caps and Treasuries.” Wall Street hasn’t taken too kindly to this year’s unicorn startups as many of them seem unproven and with many gauging an incoming recession, it’s no surprise so many market debuts have gone awry.

Can They Emerge from the Rubble?

Peloton is the first company to make cycles and treadmills equipped with screens for users to join live or previously recorded fitness classes remotely. Over the course of its inception, the company has attracted a loyal and avid following of users who stream classes from their respective homes, offices, and hotels.

The remote fitness company boasts 1.4 million members, which they define as individuals with a Peloton account. Peloton’s stationary bike runs for about $2000 and its treadmill costs over $4000. While the hefty retail prices of their two main products help them command strong margins, it does bring up the question of how the company would perform in an economic downturn when consumers don’t have $2000+ to shell out for exercise equipment.

To adress these speculations, Peloton designed an app that doesn’t require equipment and costs users less than $20 a month. Peloton started offering these digital memberships last year for $19.49 per month. The company doesn’t want to just be known for their pricey home exercise equipment, but they want their brand name to be synonymous with fitness. The company now has roughly 102,000 digital subscribers who can stream yoga, meditation, bootcamp, running, and walking classes.

The digital subscription service’s growing membership has driven net sales to surge 110% Y/Y to $915 million in fiscal 2019. However, sales growth came with an increase in net losses as well; net loss widened to $245.7 million from its $47.9 million in the prior year. The company is also facing litigation from 10 music publishers and artistic groups for using 2,200 songs without licensing even one.

Bottom Line

Peloton has its work cut out for them as investors are not looking to jump on unicorn bandwagons lately. Peloton has to show investors something that they haven’t seen in the unicorns that went public before them. The litigation it faces from the music companies also should be resolved before investors can figure out where the company might be headed.

The firm must also demonstrate that they are capable of mitigating macroeconomic headwinds if they want to take the next step. There’s no denying that the company’s business model is unique and the fitness industry hasn’t seen anything like Peloton, which makes them an interesting company that investors should keep tabs on.

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