Peloton’s Journey: From Pandemic Hero to Financial Recovery Efforts
Peloton Interactive (NASDAQ: PTON) found its calling during the pandemic, becoming a go-to for fitness lovers when gyms closed in 2020 and 2021. The surge in demand for its connected exercise equipment and online classes helped many stay active at home.
However, as life returned to normal, Peloton’s revenue slid for three straight fiscal years. In an attempt to survive, the company drastically cut its workforce, moved manufacturing overseas, and implemented cost reductions.
Peloton’s stock is currently down 95% from its peak, yet it has rebounded by 195% from its 52-week low—indicating that the company is stabilizing. As of January 1, Peter Stern, formerly at Apple (NASDAQ: AAPL), will step in as CEO, raising hopes for a turnaround.
The question remains: Is it too late for new investors to consider Peloton, or is the stock gearing up for another rise?
Declining Equipment Sales and Improving Losses
Peloton faced nine quarters of declining revenue until the latest quarter of fiscal 2024, which concluded on June 30. The slight year-over-year increase of 0.2% during that quarter didn’t indicate a strong recovery.
Recently, for the first quarter of fiscal 2025, which closed on September 30, Peloton reported total revenue of $586 million, showing a modest decline of 1.6% from the same time last year. While not disastrous, this result indicated that the company couldn’t build on its previous momentum.
The decline was significantly tied to exercise equipment sales, which fell by 11.6% to $159.6 million. On a more positive note, subscription revenue rose by 2.7% to $426.3 million.
Focusing on subscription services has become crucial for Peloton since these revenues are steady, predictable, and yield higher profit margins compared to equipment sales. Subscription revenue in the latest quarter boasted a gross profit margin of 67.8%, whereas equipment revenue only had a margin of 9.1%.
Peloton provides two types of subscriptions: one for customers with Peloton equipment and another for app users who want to access virtual classes without owning the equipment.
This quarter’s small growth in subscriptions, combined with substantial cost reductions, contributed to a notable improvement in the company’s net loss, which was under $1 million— a drastic improvement from last year’s $159.3 million loss.
However, there were challenges. By the end of the first quarter, Peloton had 2.9 million connected fitness members—a loss of 81,000 (2.7%) from the previous quarter. The Peloton app’s churn rate was even steeper, with 586,000 subscribers, reflecting a loss of 33,000 (5.4%).
Future Growth Looks Uncertain
Looking ahead, Peloton’s projections for fiscal 2025 indicate that the first quarter’s revenue and membership declines may not be one-time events.
Peloton anticipates ending fiscal 2025 with only 2.71 million connected fitness subscribers, down 9% from fiscal 2024, alongside a projected 7% drop in app subscribers.
This equates to an overall expected revenue decrease of 9%, leading to an anticipated total revenue of $2.45 billion. Such results would mark the fourth consecutive yearly decline in revenue since it peaked in fiscal 2021.
On a brighter note, Peloton expects adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of about $265 million for the year, representing an astonishing 7,398% rise from the $3.5 million in fiscal 2024.
This suggests that Peloton’s ongoing cost-cutting efforts are likely responsible for the predicted revenue drop. By reducing expenses tied to growth—such as marketing and R&D—the company aims to achieve consistent profitability without requiring further cash infusions.
Currently, Peloton’s financial situation includes $949 million in long-term debt while holding just $722 million in cash. Given the steep decline in its stock price, raising additional funds through equity offerings would heavily dilute existing shareholders, likely making this option unattractive.
Image source: Peloton.
Investing in Peloton: A Risky Proposition?
There is no assurance that Peloton can return to sustainable growth. Revenue has dropped in 10 out of the last 11 quarters, while spending on marketing and similar areas was higher when declines began. Given its history, organic growth may not materialize quickly.
With Peter Stern stepping in as CEO on January 1, expectations are high. Stern, who held key positions at Ford and helped expand several subscription offerings at Apple, may possess the expertise needed to boost Peloton’s subscription model.
However, turning the company around will take time. Expectations for fiscal 2025 suggest it could take years for Peloton’s revenue to begin growing again. The consistent decline in equipment sales poses a serious concern, as customers invested in bikes and treadmills are more likely to retain their memberships compared to app-only users.
Investors may consider buying Peloton stock if they believe in the potential for recovery, but a long-term approach of five years or longer is likely necessary. The uncertainty beyond fiscal 2025 creates significant risk for potential investors.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Peloton Interactive. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
