- Exercise bike maker and streaming fitness company Peloton filed to go public this week in what is expected to be a high-profile initial stock offering.
- Yet while CEO John Foley has repeatedly claimed his company is profitable, its IPO filing shows the company has lost $450 million over the past three fiscal years and has never made money.
- Securities regulators don't bar private companies from publicly making false statements about their profits — provided they are being truthful to their private investors and haven't registered for an IPO.
In mid-2018, Peloton co-founder and CEO John Foley was asked on CNBC if the exercise bike and streaming fitness phenomenon was profitable. His answer was "yes," repeating a claim the executive had made several times before. But a closer look at the company's finances show something else — a trail of red ink.
Over its past three fiscal years, Peloton has racked up a total of $450 million in losses, according to a regulatory filing by the company this week ahead of what is expected to be a high-profile initial public offering. Peloton also has never turned a profit, nor does it know when it will.
"We have incurred operating losses each year since our inception in 2012 ... and we expect to continue to incur net losses for the foreseeable future," the company states in the filing.
Peloton, through a spokesperson, declined to comment for this article, citing a Securities and Exchange Commission rule that prohibits a company and its executives from making certain public statements after it has filed for an IPO.
The CNBC interview was not the first time Peloton and Foley, had claimed the company was turning a profit. In December 2015, he told Bloomberg that his company "is now profitable, with 100,000 users globally." A few months later, a profile of Peloton in the May 2016 issue of Inc., which included an interview with Foley, said the company "became profitable in December 2015, just 24 months after its first bike was delivered."
Peloton's IPO filing doesn't include financials for December 2015 or for the first half of 2016. So it is possible the company notched a few months of profitability. But what is clear is that any profits did not last until 2018, or for very long at all. The IPO filing shows the company lost $163 million in the fiscal year that ended June 30, 2017, which includes the second half of 2016.
In an October 2017 article by BuzzFeed on a lawsuit against the company by exercise bike competitor FlyWheel, Peloton's senior vice president of brand marketing, Carolyn Tisch Blodgett, said the company was "effectively" profitable. "We could turn a profit, but instead we are turning the money back into the company," she told BuzzFeed.
In fact, at the time the company's operations had lost nearly $71 million in its most recent fiscal year. The company did spend nearly $13 million on research and development and another $86 million on sales and marketing. But that also included what the company spent on normal business functions, like paying rent and processing payments, not just investing in its future.
In the CNBC interview in May of 2018, a period when the company was losing more than $10 million a quarter, Foley was asked directly if the company was profitable. He answered without pause. "We are profitable, weirdly it's a beautiful business model," Foley said. "Our investors are happy. Yes."
Selling an image
It is possible Foley was referring to some other measure of profitability, and not the company's official bottom-line profits as defined by generally accepted accounting rules. But even by the company's own adjusted accounting measure, which excludes taxes and interest expenses, as well as other expenses such as stock-based compensation, acquisition costs and some of its legal expenses, the company has lost money in its past three fiscal years.
Of its last eight reported quarters, Peloton recorded an adjusted profit in just one quarter — $800,000 in the final three months of 2017. In the quarter in which Foley spoke to CNBC, the company had an adjusted Ebitda (earnings before interest, taxes, depreciation, and amortization) loss of $4.2 million.
It is unclear why Foley would say his company was profitable when it was not. Plenty of companies that have gone public have done nothing to hide their lack of profits. WeWork, the office-sharing company that, lost $689 million in the first half of 2019. Company executives have said its rapid growth is proof that its losses are paying off. And Uber called its recent $5 billion quarterly loss just part of its "peek investment year." Investors didn't seem to mind.
But Peloton is a different. It sells $2,000 bikes directly to consumers. And they are paying up because the bikes stream live spinning classes. But if potential customers believe the company is struggling, they might question whether it will be able to continue to deliver online classes. What's more, if the company is profitable, consumers might be more willing to believe Peloton is unlikely to raise the price of its $39 monthly membership.
The SEC doesn't bar private companies from lying publicly about their profits — provided they are being truthful to their private investors and haven't registered for an IPO. According to the Federal Trade Commission, however, it is against the law for a company to make material misleading statements that could induce a consumer to buy its product or service.
The FTC rules, however, are directed at corporate advertising. It is unclear if the FTC would see Foley's statements to the media about profits as advertising. The FTC would also have to prove that his claims of profitability actually helped the company sell more bikes.
Foley "may have been talking about some other measure of profits," said University of Florida professor Jay Ritter, a corporate finance expert who has reviewed Peloton's IPO statement. "But the company is definitely not profitable by generally accepted accounting rules."