Peloton deepens IPO slump with 11% tumble in trading debut

Peloton Interactive Inc. fell as much as 15 per cent in its stock market debut Thursday, becoming the latest in a long list of unprofitable tech-oriented start-ups to flop with public investors.

The New York-based company, known for its high-end exercise bikes, joined highly anticipated listings from Uber Technologies Inc., Lyft Inc. and SmileDirectClub Inc. that failed to pop on the first day of trading for shareholders who bought in at the IPO price.

The founder-controlled company was still able to raise more than US$1.16 billion in its IPO, though. But the poor reception -- along with the recent disintegration of WeWork’s offering -- has spooked at least one other IPO candidate.

Hollywood entertainment company Endeavor Group Holdings Inc. pulled its IPO Thursday, after cutting the size and price of the offering. It decided to delay the IPO after monitoring the rocky performance of Peloton, people familiar with the matter said.

Peloton’s shares opened at US$27 and closed down 11 per cent from their offering price to US$25.76 in New York trading, giving the company a value of US$7.2 billion. The fitness startup sold 40 million shares for US$29 each on Wednesday, after marketing them for US$26 to US$29.

It marks the third-worst trading debut in 10 years in the U.S. for companies that have raised at least US$1 billion, according to data compiled by Bloomberg.

Peloton Chief Executive Officer John Foley said in an interview with Bloomberg Television that he had “some disappointment” about the reception but was confident in his company’s prospects.

“It’s an interesting time in the markets,” Foley said. “There is anxiety. The markets are on edge.”

The IPO makes the company fully funded and will help it focus on adding subscribers in the coming years, he said.

Warning Sign

Peloton and WeWork haven’t been the only warning signs for IPO investors.

While most of the 11 other companies that have gone public this month priced within or above their marketed range, the largest of them, SmileDirectClub Inc., is trading about 44 per cent below its offer price in its US$1.35 billion listing.

Peloton -- like some others that have sagged since their debut -- has a dual-class share structure that gives top owners including its founder 20 votes for each share they own. Public investors only get one vote per share.

Peloton’s debut also raises questions about investment banks that have touted high valuations to founders of startups that don’t stand up once investors get a look under the hood.

“The risk is when you get valuations bid up to a point that is unworkable for the public markets,” said Howard Mason, a bank analyst at Renaissance Macro Research.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. led the offering. The shares trade on Nasdaq Global Select Market under the symbol PTON.

Yoga, Meditation

Founded in 2012, Peloton describes itself as the “largest interactive fitness platform in the world,” with more than 1.4 million members.

It also has an app that shares its exercise programming with users who don’t own its hardware but are willing to pay a monthly subscription fee for the classes, which include yoga, meditation and strength training.

Its basic “connected fitness” subscription costs US$39 a month and the bikes start at about US$2,000.

Like many startups that have gone public this year, Peloton told investors that it will stay focused on growth rather than profitability, though it outlined a path to making money.

“We totally understand the sentiment today,” Peloton Chief Financial Officer Jill Woodworth said in an interview. “As I’ve seen over the last couple of decades, there’s always been different periods of time when people focus on growth and when people focus on profitability.”

While revenue has been steadily increasing, Peloton lost US$196 million on sales of US$915 million during the 12 months ended June 30, according to filings. That compared with a loss of US$48 million on US$435 million in sales during the same period a year earlier.

Growing Base

Its growth depends on continuing to expand its subscriber base in an increasingly competitive field while keeping current customers.

The U.S. is one of the largest markets for connected fitness in the world and Peloton recently expanded into others high on that list: Canada, the U.K. and Germany. Investors are watching whether the company’s success in the U.S can be replicated elsewhere.

Otherwise, Peloton would have to empty out half the gyms in the U.S. to sign up enough customers to justify its valuation, New York University Stern School of Business professor Aswath Damodaran said in an interview.

“The core business is good, but at US$27 we’re setting it up for failure,” he said. “That’s the danger when the market sets expectations too high.”