Despite the 40% rise in Peloton’s stock, lingering issues continue to cloud its future prospects. Here’s why

Peloton Interactive (PTON -5.03%) had a great price advance when it reported fourth-quarter 2024 earnings on Aug. 22, with shares up about 40% or so. On the surface, that sounds exciting, but when you dig a little deeper into the story, the exercise equipment maker remains a troubled company. Here’s why this stock is only suitable for aggressive investors.

The Peloton rally

That huge increase in Peloton’s stock price happened practically in one day. This is a shocking increase in price in a very short period of time and should instantly raise questions for investors. The reason for the rally was the release of the company’s Q4 fiscal 2024 earnings, which looks like it must have been pretty good given the market reaction.

Image source: Getty Images.

But it really wasn’t. Yes, the company generated positive adjusted free cash flow and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). But these are non-GAAP numbers, so you have to take them with a grain of salt. The company also managed to refinance the debt that was due, solidifying its financial situation. But the effort required shifting from super-low interest rate debt (specifically a zero-coupon convertible bond) to debt with 5.5% rates. It was important to address the balance sheet, but this will lead to higher costs, not lower costs.

Overall, the “positive” news that caused investors to rush into Peloton stock was indeed mixed, at best. Peloton certainly seems on better financial footing than it was not long ago, but its foundation is certainly not strong.

Big problems persist at Peloton

For example, despite the adjusted numbers, Peloton still lost money on a GAAP basis. Red ink in the quarter was up to $0.08 per share. To be fair, that was a huge improvement over the $0.68 per share loss the year before, but the change was largely driven by cost cutting. It’s not bad to trim some fat, but even troubled companies can only trim so much fat before they hit the meat, or worse, the bones.

The real problem here, however, is that the cost-cutting was done by the co-CEO, who is acting as a garage until the company can find a new permanent CEO. In other words, Peloton’s future business direction is at best up in the air right now. When a new leader is finally brought in, they’ll need to create a plan, and that plan might — in fact, probably — require some kind of investment in the business. That will mean more expenses.

PTON data by YCharts.

The need to invest in the business is also a virtual given. That’s because the company’s core fitness equipment business is stagnant, and the new subscription app the outgoing CEO touted is floundering. Evidence of both accounts comes from subscription numbers. Peloton connected gear subscriptions fell 1% year-over-year in Q4, while the app lost a worrying 26% of its subscriber base year-over-year. The next CEO does not inherit a thriving business.

Peloton is a comeback story, and a tough one at that

Peloton’s business has been troubled for a long time. The company and stock became prominent on Wall Street due to demand driven by a unique event, the coronavirus pandemic. The good times are long gone for Peloton, and now they’re basically trying to find a way to survive long term.

Yes, the fiscal Q4 numbers were an improvement for Peloton. But they were only less bad, not good. Until a new CEO and new corporate direction emerges, it’s very hard to know what the future holds. Only the most aggressive investors should invest in this return game.