Why Peloton Stock Soared 31% in August

Actions of Peloton Interactive (PTON -0.66%) rose last month after the struggling connected fitness company posted better-than-expected results in its fiscal fourth-quarter earnings report, signaling to investors that the business may finally be on the mend.

According to data from S&P Global Market Intelligence, the stock finished last month up 31%. As you can see in the chart, all of these gains came from the earnings report. In fact, the stock fell a month before these results came out.

PTON data by YCharts

The peloton picks up speed

Peloton still faces plenty of challenges, but fiscal Q4 results showed the business is moving in the right direction in some key categories. Revenue in the quarter rose for the first time in 10 quarters, up 0.2% to $643.6 million, beating estimates of $630.6 million, as it reported a 2.3% increase in the segment subscription to 431 million dollars.

It made substantial progress on the bottom line as gross margin increased after it closed its Precor manufacturing facility in North Carolina. This caused connected fitness gross margin to increase from -37.5% to 8.3% and caused adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to increase from a loss of 34.7 USD million to USD 70.3 million.

Bottom line, the company reported a generally accepted accounting principles (GAAP) loss per share of $0.08, up from a loss of $0.68 in the year-ago quarter and better than expectations for a loss of $0.17.

Image source: Peloton.

Can Peloton keep winning?

Peloton has introduced several changes aimed at improving profitability, including a new one-time activation fee for used equipment of $95, which should help it capitalize on the healthy secondary market for used Peloton equipment.

However, broad guidance indicated that recovery still has a long way to go, as the company sees revenue down 4% in the middle to $560 million to $580 million in the first quarter, and revenue on full year down 9% to $2.4 billion. $2.5 billion due to lower hardware sales. Both forecasts were below expectations.

Peloton expects adjusted EBITDA to continue to grow, targeting $200-250 million for the full year, which means the stock is now trading at eight times the midpoint of its EBITDA forecast.

Peloton is still looking for a permanent CEO, and a full turnaround plan likely awaits a new boss. Getting the company back to solid growth will be difficult, but the potential for growth is there if the company can pull it off.