Why Peloton stock is up more than 50% this week

Actions of Peloton Interactive (PTON 6.37%) rose more than 50% this week, according to data from S&P Global Market Intelligence. The home fitness company has stabilized its revenue growth and improved cash flow, but is still losing subscribers every quarter.

After the pandemic, Peloton’s business collapsed, sending shares down more than 98%. Even after this week’s pop, the stock is still 97% off its all-time highs, meaning anyone who invested $100 at the peak has just $3 today.

Here’s why Peloton Interactive’s stock soared this week.

Stabilized revenues, improving profit margins

In Peloton’s fourth quarter, which ended in June, total membership fell to 6.4 million. That’s compared to 6.6 million a quarter ago and 6.5 million in the same quarter a year ago. While this is obviously not a good thing, Peloton is streamlining its business and seeing solid financial improvement compared to a few years ago.

Revenue was flat year-over-year in the quarter at $644 million, meaning Peloton can get more revenue from its core customers. Gross margins improved by a ton, leading to a 55% increase in gross profit in the quarter.

Importantly, net income and free cash flow improved significantly. The net loss was just $30 million, compared with $240 million a year ago. Free cash flow was actually positive at $26 million. All of these are major financial improvements from 2022, when investors worried that Peloton could go out of business.

Another thing that may have boosted Peloton stock’s gains this week was the high short interest the stock has. Indeed, 20% of its shares are estimated to be short-sold, meaning lent to short-sellers. When a stock starts to rise, short sellers can buy back these borrowed shares to cover their shorts, which can create a short squeeze. There may have been a brief squeeze this week.

Is the stock a buy?

Peloton’s stock is on the rise and now has a market cap of $1.8 billion. Generating $2.7 billion in revenue and returning to positive profitability, one could argue that Peloton is a buy at these low prices.

Still, I think investors should avoid the stock. Total membership — that is, Peloton users — has been declining for years. In the third quarter of fiscal year 2022, it had a total of 7 million members. Now that’s down closer to 6 million, management hasn’t proven it can stop the bleeding.

Unless you believe a change in active users is imminent, you should avoid buying Peloton stock right now.