Peloton Stock Has Soared 195% From Its 52-Week Low. Is It Too Late to Buy?

Peloton Interactive (NASDAQ: PTON) was a savior for fitness enthusiasts during the depths of the pandemic. When lockdowns and social distancing protocols were implemented in 2020 and 2021, demand soared for the company's connected exercise equipment and virtual fitness classes.

However, Peloton's revenue has declined in each of its last three fiscal years as social conditions gradually returned to normal. The company has been in a fight for survival that involved slashing half of its workforce, offshoring its manufacturing, and trimming costs across the board.

On one hand, Peloton stock is down 95% from its all-time high. But it's also currently up by 195% from its 52-week low because its efforts have been paying off. The company has significantly reduced its losses and stabilized its revenue, and on Jan. 1, Peter Stern, who recently spent seven years at Apple (NASDAQ: AAPL) will join the company as its new CEO.

In the wake of that recent rebound, is it too late for new investors to buy into Peloton, or might the stock be preparing to pick up speed?

Shrinking equipment sales, but improving losses

Peloton suffered nine consecutive quarters of shrinking revenue until the final quarter of its fiscal 2024, which ended on June 30. However, with year-over-year growth of just 0.2% in that quarter, it wasn't exactly a vigorous return to positive territory.

Peloton just reported results for its fiscal 2025 first quarter, which ended Sept. 30. It generated $586 million in total revenue, which was a modest 1.6% decline from the prior-year period. That wasn't a catastrophic result, but the company failed to build on its positive momentum.

Exercise equipment was the source of that weakness, as sales fell 11.6% to $159.6 million. Subscription revenue, on the other hand, grew 2.7% to $426.3 million.

Subscription revenue has been a key focus for Peloton, because it's recurring, predictable, and has much higher profit margins than equipment sales. During its fiscal Q1, subscription revenue carried a gross profit margin of 67.8%, compared to just 9.1% for equipment revenue.

Peloton offers two subscription products. First, connected fitness subscribers are customers who own Peloton's equipment and pay monthly fees for access to specialized workout plans and other benefits. Second, Peloton app subscribers are customers who want to access its virtual classes and track their fitness journey even if they don't own any of the company's equipment.

The quarter's modest growth in subscription revenue, combined with significant cost cuts, led to a massive improvement in the company's losses on the bottom line. During fiscal Q1, it generated a net loss of less than $1 million -- a huge reduction from the $159.3 million net loss it delivered in the prior-year period.

But it wasn't all good news on the subscription front. Peloton had 2.9 million connected fitness members at the end of fiscal Q1, which was a decline of 81,000 (2.7%) from three months earlier. On a percentage basis, churn was even higher for the Peloton app, which ended the period with 586,000 members, representing a sequential loss of 33,000 (5.4%).

No growth in sight

Based on Peloton's forecast for the fiscal 2025 full year, it appears that its declines in total revenue and paid memberships during fiscal Q1 weren't anomalies.

The company expects to end fiscal 2025 with 2.71 million connected fitness subscribers, which will represent a drop of 9% compared to fiscal 2024. It also anticipates a 7% drop in Peloton app subscribers.

That's going to result in a 9% reduction in Peloton's total revenue, which is expected to come in at $2.45 billion. That will mark its fourth consecutive annual decline since revenue peaked in fiscal 2021.

On the plus side, at the midpoint of its guidance range, Peloton is expecting to deliver around $265 million in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) during fiscal 2025, which would be a whopping 7,398% increase from the $3.5 million it reported in fiscal 2024.

To me, that suggests that the company's cost-cutting efforts will be the primary reasons for Peloton's expected decline in revenue. It is trying to position itself for consistent profitability by trimming growth-oriented expenses like marketing and research and development, which will prevent the need for further cash injections in the future.

That's probably the right strategy, because Peloton currently has $949 million in long-term debt with just $722 million in cash on hand. Moreover, considering how far the stock price has plunged from its peak, raising fresh capital through an equity offering would result in substantial dilution for existing shareholders, so that's probably out of the question.

Image source: Peloton.

Peloton stock might not be a great value right now

There is no guarantee Peloton will return to a position where it can grow sustainably for the long term. Remember, its revenue has declined in 10 of the last 11 quarters, and the company was spending far more on things like marketing when those declines started compared to today. Based on its track record, it's hard to imagine the company will suddenly unlock organic growth.

But Peloton's new CEO will start on Jan. 1. Stern is currently serving as the president of integrated services at Ford, but from 2016 to 2023, he held various high-level positions at Apple, the world's largest consumer products company. While there, Stern was responsible for scaling up several subscription-based products, including iCloud, Apple News, Apple One, and Apple Fitness+ -- which happens to serve a similar purpose to the Peloton app. His expertise might be exactly what Peloton needs to take its subscription business to the next level.

With that said, Stern won't be able to turn the company around overnight. Considering management's forecast for fiscal 2025, it could be a couple of years before Peloton's annual revenue returns to growth (assuming it ever does). The consistent decline in equipment revenue is a real concern, because customers who have invested thousands of dollars in products like the Bike, Tread, or Row are more likely to maintain their subscriptions than those who just use the app.

It's not too late to buy Peloton stock if you think there is real substance to this turnaround story, but taking a long-term view of five years or more will probably be necessary. The lack of visibility beyond fiscal 2025 creates significant uncertainty, so investors need to be comfortable with the possibility that this company might never return to its glory days.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Peloton Interactive. The Motley Fool has a disclosure policy.