If you thought Peloton was just a company that made high-tech stationary bikes and treadmills, the company has news for you.

"We are a technology, media, software, product, experience, fitness, design, retail, apparel, logistics company," Peloton writes in its initial public offering prospectus, filed Tuesday

Of course, it's not unusual for companies to highlight their grand ambitions as a way to drum up investor interest ahead of an initial public offering. (WeWork, if you will recall, recently stated in its own prospectus that its mission is to "elevate the world's consciousness.") It's true that New York City-based Peloton designs its own products, sells branded apparel, and has 74 retail showrooms across the U.S., the U.K., and Canada. The company streams original fitness content to more than half a million subscribers through its apps, and also handled in-house 58 percent of all product deliveries for the fiscal year that ended on June 30. As co-founder and CEO John Foley explains in a letter to prospective investors included in the filing, "Peloton is so much more than a bike."

And therein lies the rub. If Peloton spreads itself too thin, many of the company's big ambitions could backfire. "They do the digital fitness thing really, really well; their financials reflect that," says Michael Kawamoto, equity research analyst at D.A. Davidson. Peloton's revenue more than doubled to $915 million in FY 2019, up from $435 million the year before. "And now you're telling people you're doing all these [other] things. I don't want the message to get washed out."

Getting the message right is only one of the challenges ahead for Foley and his team. Peloton is still largely unprofitable, despite earlier comments to the contrary. It is embroiled in a series of lawsuits that could adversely affect its business. And while Peloton frequently touts its "high-touch" delivery and assembly service, it outsources a significant portion of that work to a third-party logistics firm, which means the company can't always control the customer experience. With the added scrutiny that comes from listing shares on a public exchange--Nasdaq, in Peloton's case-- these hurdles could make it even more difficult for the company to turn a profit.

Defining what Peloton is (and what it isn't).

Peloton has amassed a cult following for its at-home exercise products since its founding in 2012. By its own metrics, fewer than 1 percent of subscribers cancel their online fitness class subscriptions each month on average, and 78. 6 percent of its revenue for FY 2019 came from selling Peloton machines. By contrast, apparel sales, which the company lists under "other" revenue, accounted for only 1.6 percent of its overall revenue.

If Peloton is going to nab the reportedly $8 billion valuation it wants--almost doubling its last private valuation of $4.15 billion from a year ago--it needs to get Wall Street on the same page about what it does. "Are they a consumer products company or are they a media technology company?" adds Kawamoto. "I'm still trying to figure that out."

Resolving pending litigation.

In March, a group of music publishers filed a $150 million lawsuit against Peloton. The complaint alleges the company used copyrighted songs in its workout videos without securing the proper licenses. In response, Peloton filed its own counterclaim against the plaintiffs and the National Music Publishers Association, a trade association to which the plaintiffs belong. The case is significant because. as Peloton states in its S-1 filing, "music is an important element of the overall content that we make."

Moreover, legal proceedings can be lengthy, expensive, and especially distracting for the company's leadership. It's best to avoid a drawn-out court battle, says Kawamoto. "If you're Peloton, you probably want to get this issue behind you as quickly and quietly as possible."

Providing a consistent "high-touch" experience.

Peloton charges customers a mandatory $250 fee for a "hassle-free, professional in-home delivery and assembly service." Multiple complaints on the Better Business Bureau website, and social media sites, however, tell a different story. Frustrated customers describe weeks-long delivery delays, incomplete and incorrect orders, and assembly issues involving XPO Logistics, one of Peloton's last-mile delivery partners.

Third-party companies deliver 42 percent of Peloton's orders, according to its S-1 filing. An inconsistent customer experience, by the company's own admission, could damage its reputation and adversely affect its business. If job postings are any indication, it appears as though Peloton is ramping up its efforts to bring more of its logistics operations in-house, which should help alleviate the issue.

Outlining a clear path to profitability.

Like many other unicorn startups going public in 2019, Peloton is still unprofitable, and it's burning cash quickly. The company reported $195.6 million net loss for fiscal year 2019, up from $47.8 million the year before. To date, Peloton has sold about 577,000 exercise machines--almost all of them in the U.S., and nearly half within the last year. The company says it has captured only about 4 percent of what it sees as its potential market. "They're going to have to continue to grow at a pretty robust pace to achieve profitability," says Kawamoto, noting Peloton's domestic sales are likely to decelerate in the coming years. The overall market for bikes and treadmills in the U.S. has not grown at the same quick pace as Peloton's sales, he adds, which could signal the company could approach market saturation. "It's a concern," he says. "It's going to come down to their being able to provide a viable path to profitability going forward."

Published on: Aug 30, 2019