3 facts you need to know about Peloton before buying the stock

Peloton Interactive (PTON 0.65%) made a splash recently when it reported its financial results for the fourth fiscal quarter 2024 (ended June 30). The market was ecstatic, sending shares 35% higher on news that the business posted a small revenue gain and continued to narrow its net losses.

Before you rush out to buy this bicycle stock although it’s still trading well below its all-time high, here are three things you need to know about Peloton.

1. Changing the sales mix

When demand for its products was skyrocketing, Peloton was undoubtedly a hardware company. In fiscal year 2021, 70% of the company’s revenue was derived from the sale of training equipment. In fact, Peloton was having trouble keeping up with demand.

In his roughly two years as CEO, Barry McCarthy, who previously spent time at Netflix and Spotifywanted to transition Peloton away from hardware sales. In fiscal year 2024, 63% of revenue came from subscriptions, with the rest from equipment.

The advantage is that subscriptions have a star gross margin of 68.2%, while Peloton barely makes any money from its equipment sales. To be clear, though, if Peloton were still selling their bikes and treadmills like hotcakes, then I’m sure memberships would be a much smaller percentage of total sales.

2. Financially unfit

Like many tech stocks, Peloton has struggled to post positive net income. Over the last three fiscal years, the cumulative net loss totaled $4.6 billion. The company’s entire market cap is currently $1.8 billion.

The management team emphasizes drastic cost reductions to streamline the expense structure. It targeted annual cuts of $200 million. That focus helped narrow its net loss from $242 million in the year-ago period to $30 million in Q4. Wall Street analysts still see the company as meeting generally accepted accounting principles (GAAP) losses in each of the next three fiscal years and probably beyond.

It’s a grim sight when you look at it balance sheetalso. Peloton could to restructure its debt in July, which extended the deadlines. This gave the business some much-needed breathing space and probably resulted in a less pessimistic outlook from the market. But as of June 30, Peloton still had $1.5 billion in senior convertible notes and a term loan. This is not so encouraging.

3. The reality of the fitness industry

Peloton deserves a ton of credit. It sold its first stationary bike in 2013 and now has millions of connected fitness subscribers who have all purchased a piece of equipment. The company found a niche in the market by integrating technology, proprietary software and content into its own hardware products. This is no different from what Apple he did it remarkably well.

In the depths of the pandemic, when the business was firing on all cylinders, the bulls were certain that Peloton would become a massive global fitness empire. But the unfavorable nature of the industry got in the way. It is very difficult to find lasting success in the exercise industry.

History is littered with fitness fads, shiny new toys that consumers gravitate towards. And these people tell themselves they’ll stick to their workout routines, which is a bad bet for a company.

Not only that, but the industry is also competitive. There are other manufacturers of exercise equipment with internet access. And when it comes to content offerings, consumers can access free online workout videos as well as a number of other apps available. We haven’t even mentioned the more than 30,000 fitness studios that are scattered across the country.

Investors looking to scoop up the stock may change their minds now that they know Peloton’s plight.