Peloton – Game on.

Peloton finally gets one right.

• Peloton’s move into virtual cycling games should provide some exclusivity for its bikes which if taken to its logical conclusion may help cushion the company from further gross margin erosion.
• Peloton has released a new game called Lanebreak for its bikes which is similar to the common rhythm games for mobile phones except that with Lanebreak, one pedals rather than taps one’s phone screen.
• The idea is to break obstacles, fill up gauges, and so on and the difficulty can be set with the resistance knob on the bike.
• This is nothing particularly special on its own but the key fact to bear in mind is that this game is only available if the user owns a Peloton bike.
• This will have no immediate effect at all on the problems that I have detailed in previous posts (see here), but crucially this could be the genesis of a much wider move to make the experience on Peloton more equipment more compelling.
• This is crucial as Peloton has made a commitment to hardware manufacturing and Peloton is not Apple contrary to what many seem to think.
• The difference between the two is that Apple does not make its user experience available on 3rd party hardware, but Peloton does.
• This means that if a user wants to use the service, he does not have to pay a high price for the hardware but can instead use something else.
• This is the secret of the iPhone’s 50%+ gross margin because, without exclusive access to the iOS ecosystem, RFM has estimated that iPhone’s gross margin would be around 20%.
• Unless the Peloton user experience is exclusive to its fitness equipment, the high margins that it has enjoyed to date will continue to come under relentless pressure.
• This is why this move and what may follow is so important as if exclusive games and services become a must-have, then people will happily pay a premium to own a Peloton bike.
• I suspect that some form of virtual cycling environment like Zwift or BKool Simulator will be next, and Peloton could end up buying one of these services rather than building it itself.
• That being said, buying one of these services and making it exclusive to Peloton would kill the community that already exists and so any acquisition of this nature would need to be approached with great caution.
• Although this is a good step in the right direction, the valuation of this company still gives me the chills.
• The shares are currently trading on 213x 2022 adj. EPS and 6.4x EV / revenue underpinning the view that this remains a narrative-driven stock with no fundamental basis.
• I would not want to be around when the fickle market gets bored of the stay-at-home cycling story.