Two companies with niche products trying to lean into subscriptions. Is one better than the other or are they both high risk options?
There’s one unfortunate similarity between exercise equipment maker Peloton (PTON 9.43%) and camera maker GoPro (GPRO 0.52%) — their stocks have lost huge amounts of value over the past few years. GoPro is the “better” performer, only down around 85% from its high water mark in 2021. What’s going on with these two companies and is it worth stepping in to catch either of these falling knives?
GoPro and Peloton: More similarities
On the surface, GoPro and Peloton seem to be starkly different companies. GoPro’s cameras are nothing like Peloton’s exercise equipment. But if you step back and think at the company level, they are both focused on making niche devices. Peloton’s equipment is only attractive to people who work out and GoPro’s super tough cameras are largely used by people who do extreme things (and want to film it). In some ways, it would seem more fitting if these consumer discretionary companies were part of larger conglomerates since that would add diversity to their product lineups.
There’s another interesting similarity in the business model shifts the two companies are making. Selling devices is fine, but can lead to lumpy results. When Peloton’s connected exercise bikes were all the rage, the company couldn’t keep up with demand and there were waiting lists. Now that the fad is over, demand levels just aren’t the same anymore. GoPro’s devices are a bit more niche, but they still have to deal with product cycles (new cameras can lead to a quick bump in sales that fades out over time) and seasonal demand variations (the holiday season).
To help smooth financial performance, both companies are trying to build subscription-based businesses. Peloton’s offering is basically an online workout service. GoPro’s subscription provides access to storage and editing tools. The benefit to each company is that subscriptions provide consistent revenue. Subscriptions are also much higher margin offerings since the technology used to support them gets leveraged over a large number of customers and adding new customers comes with minimal additional costs.
GPRO data by YCharts
Further along, but not better off
Peloton is further along with its subscription shift because its exercise equipment always had a subscription component. Nearly 60% of the company’s revenue comes from subscriptions. But there’s a nuance here, since the company’s most recent push is to offer subscriptions through an application that doesn’t necessarily require buying its physical equipment. The number of App subscriptions fell 21% year over year in the fiscal third quarter of 2024 and dropped 6% sequentially from the fiscal second quarter.
The App has less than 700,000 subscribers while the subscription services tied to its devices has around 3 million subscribers. The device related subscription figure was flat year over year in the fiscal third quarter and up 1% sequentially. That hints at a core business that is stagnant while the new business, which is supposed to provide growth, is struggling to gain traction.
By comparison, GoPro’s subscriber base grew 12% year over year in the fourth quarter of 2023 and was also up, though only slightly, on a sequential quarter basis. The service is proving fairly sticky, with first year renewal rates of around 60%, second year renewal rates of around 70%, and third year renewal rates of roughly 80%. The problem is that the company estimates that subscriptions represent around $125 million in annualized revenue for a company that generated revenue of roughly $1 billion dollars in 2023, making this line of business roughly 13% of the total. In other words, often volatile camera sales are still the big driver here.
GPRO EPS Diluted (Quarterly) data by YCharts
The last important piece of the comparison is the simple fact that Peloton is losing a significant amount of money while GoPro has basically been hovering around breakeven for years. That’s not exactly a compelling selling point for either company, but GoPro seems to be operating from a stronger position than Peloton both financially and with subscriptions. Notably, Peloton just announced a large layoff and is parting ways with its CEO, who has been overseeing the subscription push, without a permanent replacement ready to step in.
Which is better, if either?
At the end of the day, most investors will probably want to avoid both Peloton and GoPro. They are high-risk companies making material business transitions that are important, but clearly not complete. And yet GoPro’s efforts appear to be going better, so it probably has a leg up on Peloton for investors with a good amount of risk tolerance. Just go in understanding that each of these companies still has to prove that their revamped business models will lead to sustainable success.
