A return to Peloton? Should investors take a ride on the stock?

Stock prices of Peloton Interactive (PTON 1.24%) soared after the embattled company reported that it marginally increased revenue in the fiscal fourth quarter of 2024 and moved closer to profitability. Shares rose more than 35% during the trading session following the release of its fourth-quarter report, but the stock is still trading up more than 25% on the year.

Could this be the right time for investors to jump into stocks and take a ride?

Peloton reported a return to revenue growth

Peloton has been hit by several problems in recent years. Two of the biggest takeaways from the COVID-19 crisis have been inflated inventory levels and shrinking gross margins. The company confused the push of the pandemic with the demand for a “new normal”. As a result, it manufactured too much inventory, which it then had to store at high cost. This resulted in negative gross margins on its product sales from fiscal 2021 through fiscal 2023. In fiscal 2024, Peloton was able to reverse this.

However, revenue growth remained elusive for the company until its most recent quarter.

In the fourth quarter of fiscal 2024 (ended June 30), the company’s revenue rose 0.2% year over year to $643.6 million, beating analysts’ consensus expectations for revenue of $631 million. It was the first time Peloton posted revenue growth after the second quarter of fiscal 2022, which fell during the 2021 holiday season. Specifically, Q4 product revenue was down 4% year-over-year to $212.1 million, while subscription revenue rose 2% to $431.4 million. On a sequential basis, subscription revenue was down 1% from $437.8 million.

Meanwhile, the products segment’s gross margin was 8.3%. This was a huge improvement from the negative margin of 37.5% a year ago. Subscriptions gross margin was 68.2%, up 100 basis points year over year. The number of paid connected fitness subscriptions closed fell 1% to 2.98 million and was down 2% sequentially. Churn was 1.9%, compared to 1.8% a year ago. Paid app subscriptions fell 26% year-over-year to 615,000 and were down 9% sequentially. The average monthly rate of paid apps was 8.4%.

Overall, adjusted EBITDA was $70.3 million, a huge improvement from the $34.7 million loss a year ago and a significant increase from the $5.8 million EBITDA generated in fiscal Q3. Meanwhile, its net loss narrowed to $30.5 million from $241.8 million a year ago

Operating cash flow was $32.7 million, while free cash flow was $26 million.

Peloton’s management estimates fiscal 2025 Q1 revenue to be between $560 million and $580 million, down 4% year-over-year at midpoint. It’s looking for adjusted EBITDA of $50 million to $60 million, which would be a 500% improvement in the midpoint. Paid connected fitness subscriptions are expected to decline 3% year-over-year to 2.88 million and 2.89 million users, and paid app subscriptions are expected to decline 26% to 560,000 and 570,000.

For the full fiscal year, project management revenue will fall about 9% in the middle to $2.4 billion to $2.5 billion. But adjusted EBITDA is expected to increase from $3.5 million to between $200 million and $250 million. Paid connected fitness subscriptions are expected to decline 9%, while paid app subscriptions are expected to decline 3%. It also projected free cash flow of $75 million.

Image source: Getty Images

Is it too late to buy Peloton stock after the rally?

Peloton is doing a lot of good things to fix its business. It is in the midst of reducing its cost structure by $200 million, which will help boost EBITDA next year. It has also scaled back its media spend and plans to optimize its marketing spend this fiscal year to continue to improve customer acquisition efficiency.

Meanwhile, it has entered into content licensing partnerships with Lululemon and AlphabetGoogle Fitbit to help grow subscriber base and generate subscription revenue. It also hopes to capitalize on aftermarket sales by implementing a $95 used product activation fee and continues to target rentals with its Bike+ rental program.

On the hardware side, treadmill sales were strong, up 42% in the quarter; this market represents a beautiful opportunity for the company. Peloton will also continue to look to improve the segment’s gross margins by reducing discounting.

The stock currently trades at a forward multiple of enterprise value to EBITDA of 18. That’s an achievement in itself, as until recently, Peloton was not EBITDA positive. Meanwhile, it has turned free cash flow positive, which is important given its debt load.

PTON EV to EBITDA data (before) by YCharts.

That said, investors should probably continue to take a cautious approach to the stock. The company’s major issues have been resolved, but its revenue growth is still modest and subscriber numbers are still declining. Also, the company still has a fair amount of debt.

Its guidance for fiscal 2025 looks relatively conservative, which is good, and the board is still looking for a new CEO. However, for the company’s results to improve, the economy will have to cooperate.

As such, I think interested investors could take a small speculative position in the stock as Peloton continues its turnaround efforts, but I wouldn’t suggest going all-in on the stock.