Peloton Interactive's (PTON +4.65%) stock has had a great month, with the shares gaining around 33%. Most of that came after the company announced fiscal fourth-quarter 2024 earnings. The problem is that the earnings announcement that sparked a roughly 40% rally in the company's shares wasn't really good, it was just less bad. Peloton has a lot to prove over the next year.
Peloton is a broken fad stock
To fully understand Peloton, you need to go back to the height of the coronavirus pandemic, when consumers practiced social distancing, businesses shut down, and employees worked from home. At that point, Peloton's connected exercise equipment was all the rage because it allowed users to, basically, simulate being in a gym. The company couldn't keep up with demand and leaned in hard, opening physical stores and ramping up production.
Image source: Getty Images.
Eventually, however, the world managed to learn to live with COVID. Businesses reopened and people started going back to the gym. Demand for Peloton's equipment fell, leaving it saddled with high costs and bleeding red ink. A new CEO came in and shifted the business model, pushing out a fitness subscription service. The move made some sense, given the company's subscription-based model around exercise equipment. However, that business just hasn't caught on as hoped and the CEO who spearheaded the effort is now gone.
Along the way, Peloton stock went from fad to forgotten. Even after the huge gain since fourth-quarter 2024 earnings were released, the stock is still down more than 95% from its highs in 2021. Peloton is a turnaround stock at this point.
Why did Peloton stock take off?
A turnaround stock that moves sharply higher on earnings might sound like a story you'd be interested in. Don't get too excited about Peloton. Fiscal fourth-quarter 2024 earnings were just less bad, not good. Yes, revenue increased year over year in the period ended June 30, but only by 0.2%. That could easily be chalked up to randomness. Earnings, meanwhile, came in at a loss of $0.08 per share. Sure, that was much better than the $0.68-per-share loss experienced a year earlier, but the company is still bleeding red ink.
The big hoopla is probably because the company generated positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and positive adjusted free cash flow. That suggests that the company has stabilized its business enough to muddle through. Those results, however, came after a material cost-cutting effort. A company can't cut its way to long-term profitability; at some point, it needs to spend on growth. Just bumbling along, barely surviving, isn't going to make Peloton, or any other company, a good investment.
NASDAQ: PTON
Key Data Points
Which is where the subscription numbers come in. The company's core connected fitness gear witnessed a 1% year-over-year decline in subscriptions in the quarter. The new fitness app subscription business saw a subscriber decline of 26%. This is not a business that is hitting on all cylinders.
The bigger problem, however, is that Peloton still hasn't replaced its CEO. The interim co-CEOs appear to be doing a reasonable job of stemming the bleeding, but the long-term direction of the company remains up in the air. The only comment from the company on the CEO issue was, basically, we are working on it. Until that new CEO is in place, there's really no way to know what Peloton's future will hold because it is just trying to run in place.
The next year will be telling for Peloton
It isn't easy to find a CEO who is willing to take on a turnaround situation as dire as the one Peloton faces. It is even harder to find one who has the experience to take on the job. But that's what has to happen at some point over the next year. And then the hard work will start, as the new CEO learns the company from the inside and sets a new path forward.
The less-bad fourth-quarter results were nice to see, but Peloton is only appropriate for aggressive investors willing to ride out continued volatility in the stock and, more worrisome, the company's business model. In a year the business model issue should be more clear, maybe.
