Peloton Interactive (NASDAQ: PTON) makes at-home exercise equipment fitted with digital screens, which can be used to stream everything from virtual classes to music. Its stock soared to an all-time high of $163 near the end of 2020 on the back of surging sales as consumers sought ways to remain active during lockdowns.
But demand has plunged since then, and the company's losses grew so large that it has been in a fight for survival over the past year. As a result, Peloton stock now trades at just $4.84 -- a whopping 97% discount to its record high.
The company reported its financial results for the fiscal 2024 fourth quarter and full year (ended June 30) last week, sending its stock soaring 44%. While there were some positive takeaways in the report, I don't think they will be enough to reverse the company's fortunes. Here's why.
Peloton grew for the first time in over two years
Peloton suffered nine consecutive quarters of declining revenue dating back to Q2 fiscal 2022, but it finally reversed that trend in the recent quarter -- albeit modestly, with year-over-year growth of 0.2%. But there was a catch.
Equipment sales accounted for $212.1 million of Peloton's $643.6 million in total Q4 revenue, which was actually down 3.7% from the year-ago period. That means sales of the company's flagship products are still shrinking. All of Peloton's growth came from its subscription revenue of $431.4 million instead, which increased by 2.1%.
The company has two types of paying subscribers: First, connected fitness subscribers are customers who own Peloton's equipment and pay a monthly fee for specialized workouts and other benefits. Second, Peloton app subscribers are customers who might not own the brand's equipment, but who still want to access virtual fitness classes and track their workout activity.
Subscriptions are great because they provide recurring revenue streams, and they also carry a high gross profit margin which was 68.2% in Q4, compared to just 8.3% for the equipment business. Combined with significant cost cuts, growing subscription revenue has allowed Peloton to gradually shrink its net losses. The company still lost $30.5 million on the bottom line in Q4, but that was a substantial improvement from the $241.8 million net loss it generated in the year-ago period.
But it isn't all good news. Peloton had 2.98 million connected fitness subscribers at the end of Q4, which was a reduction of 75,000 from the same time last year. The rate of churn was even worse for its app, which had 615,000 subscribers, representing a loss of 59,000 (or 8.7%).
Peloton's forecast for fiscal 2025 points to more pain
I mentioned at the top that Peloton's progress in the recent quarter might not be enough to reverse its fortunes. Well, the company's forecast for the upcoming fiscal 2025 first quarter (ending Sept. 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 might have been an anomaly rather than the beginning 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 set to fall by as much as 11%, to $2.4 billion.
On the positive 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 from its fiscal 2024 result of $3.5 million. Adjusted EBITDA is Peloton's preferred measure of profitability, and its growth is a key focus for the company.
Basically, management's goal is to stabilize Peloton's bottom line by continuing to cut costs, and once profits are consistently rolling in, it intends 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 Peloton can achieve a sustained return to revenue growth. Remember, the company was on a streak of nine straight quarters of shrinking revenue coming into Q4 fiscal 2024, while still spending far more money on growth initiatives than it is today.
In fact, Peloton actually increased its marketing spending slightly during fiscal 2024, and yet its revenue still shrank by $100 million compared to fiscal 2023.
The strong improvement in profitability is a great sign, and the company also refinanced its debts out to 2029, recently which will ensure it averts a worst-case scenario in the near future. But none of that matters in the long run if consumers simply aren't buying Peloton's equipment, and if subscribers continue to drop off -- investors will still be left with a shrinking company.
It's difficult to know when (or even if) Peloton's sales will bottom, but with management forecasting further declines throughout fiscal 2025, now probably isn't the time to dive in and buy the stock. I think some of its gains from last week will actually fade as investors digest what lies ahead, and there are certainly better opportunities to consider in the market right now.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy.
