Peloton shares surged 44% last week, but here’s why the rally could fade

Peloton Interactive (PTON 1.24%) makes home exercise equipment equipped with digital screens that can be used to stream everything from virtual classes to music. Its stock rose to an all-time high of $163 near the end of 2020 amid rising sales as consumers looked for ways to stay active during the lockdowns.

But demand has since fallen and the company’s losses have grown so high that it has been in a fight for survival for the past year. As a result, Peloton shares are now trading at just $4.84 — a whopping 97% discount from their all-time high.

The company reported its financial results for the fiscal fourth quarter 2024 and the full year (ended June 30) last week, sending the stock up 44%. While there were some positive takeaways from the report, I don’t think they will be enough to reverse the company’s fortunes. Here’s why.

Peloton has grown for the first time in over two years

Peloton has suffered nine straight quarters of revenue declines since Q2 fiscal 2022, but finally reversed that trend last quarter — albeit modestly, with a year-over-year increase of 0.2%. But there was a catch.

Equipment sales accounted for $212.1 million of Peloton’s total revenue of $643.6 million, which was actually down 3.7% compared to the period last year. That means sales of the company’s flagship products are still declining. All of Peloton’s growth instead came from subscription revenue of $431.4 million, which was up 2.1%.

The company has two types of paying subscribers: First, connected fitness subscribers are customers who own Peloton gear and pay a monthly fee for specialized workouts and other benefits. Second, Peloton app subscribers are customers who may not own the brand’s equipment, but still want to access virtual fitness classes and track their workout activity.

Subscriptions are great because they provide recurring revenue streams and also have a high gross margin, which was 68.2% in Q4 compared to just 8.3% for the equipment business. Combined with significant cost reductions, growing subscription revenue has enabled Peloton to gradually reduce its net losses. The company still lost $30.5 million on its bottom line in Q4, but that was a substantial improvement over the $241.8 million net loss it posted in the year-ago period.

But it’s not all good news. Peloton had 2.98 million connected fitness subscribers at the end of the fourth quarter, which was a decrease of 75,000 from the same period last year. The churn rate was even weaker for its app, which had 615,000 subscribers, a loss of 59,000 (or 8.7%).

Peloton’s forecast for fiscal 2025 points to more pain

We mentioned at the beginning that Peloton’s progress in the last quarter might not be enough to reverse its fortunes. Well, the company’s forecast for the upcoming quarter of 2025 (ended September 30) suggests it could lose another 100,000 connected fitness subscribers and another 55,000 app subscribers.

As a result, Peloton’s total revenue is expected to decline 4% year-over-year and 11% sequentially. In other words, the company’s growth in Q4 may have been an anomaly rather than the start of a new trend.

The picture for the full year doesn’t look much better. Peloton expects to lose up to 300,000 connected fitness subscribers in fiscal 2025, with total revenue expected to drop as much as 11% to $2.4 billion.

On the plus side, the company could generate as much as $250 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in fiscal 2025, which would be a huge increase over its fiscal 2024 result of 3 .5 million dollars. Adjusted EBITDA is Peloton’s preferred measure of profitability, and its growth is a key goal for the company.

Basically, management’s goal is to stabilize Peloton’s bottom line by continuing to cut costs, and once profits are steady, they plan to reposition the company for a return to revenue growth.

Image source: Peloton Interactive.

But don’t rush to buy Peloton stock

There is no guarantee that Peloton can achieve a sustained return to revenue growth. Remember, the company was on a streak of nine consecutive quarters of revenue declines in fiscal 4Q24 while spending far more money on growth initiatives than it is today.

Actually, Peloton actually grew up its marketing spending fell slightly in fiscal 2024, and yet its revenue was down $100 million compared to fiscal 2023.

The strong improvement in profitability is a great sign and the company also refinanced its debt till 2029 recently, which will ensure that it avoids a worst-case scenario in the near future. But none of that matters in the long run if consumers simply don’t buy Peloton’s gear and if subscribers keep dropping out — investors will still be stuck with a shrinking company.

It’s difficult to know when (or even if) Peloton’s sales will decline, but with management forecasting further declines through fiscal 2025, now probably isn’t the time to jump in and buy the stock. I think some of its gains from last week will actually fade as investors digest what’s ahead, and there are certainly better opportunities to consider in the market right now.