Peloton Interactive(NASDAQ: PTON) made a splash recently when it reported its financial results for its fiscal 2024 fourth quarter (ended June 30). The market was ecstatic, sending shares 35% higher following the news that the business eked out a tiny revenue gain and continued to lower its net losses.
Before you rush to buy this bike stock while it still trades well below its all-time high, here are three things you need to know about Peloton.
1. Changing sales mix
When demand for its products was through the roof, Peloton was undeniably a hardware company. In fiscal 2021, 70% of the company's revenue was derived from the sale of exercise equipment. Peloton was actually having trouble meeting demand.
During his roughly two years as CEO, Barry McCarthy, who spent time previously at Netflix and Spotify, wanted to transition Peloton away from sales of hardware. In fiscal 2024, 63% of revenue came from subscriptions, with the remainder coming from equipment.
The benefit is that subscriptions carry a stellar gross margin of 68.2%, whereas Peloton barely makes money on its equipment sales. To be clear, though, if Peloton were still selling its bikes and treadmills like hotcakes, then I'm sure subscriptions would represent a much lower percentage of overall sales.
2. Financially unfit
Like many growth tech stocks, Peloton has struggled to post positive net income. In the last three fiscal years, its cumulative net loss totaled a gut-wrenching $4.6 billion. The company's entire market cap is currently $1.8 billion.
The leadership team is emphasizing drastic cost cuts to streamline the expense structure. It has targeted $200 million in annual reductions. This focus helped lower the net loss from $242 million in the year-ago period to $30 million in Q4. Wall Street analysts still see the company registering generally accepted accounting principles (GAAP) losses in each of the next three fiscal years, and probably after that as well.
It's a grim view when looking at the balance sheet, too. Peloton was able to restructure its debt in July, which extended maturities. This gave the business some much-needed breathing room, and likely resulted in a less pessimistic outlook from the market. But as of June 30, Peloton still carried $1.5 billion total in convertible senior notes and a term loan on the books. This isn't all that encouraging.
3. The reality of the fitness industry
Peloton deserves a ton of credit. It sold its first stationary bike in 2013 and now has millions of connected-fitness subscribers who have all purchased a piece of equipment. The company found a niche in the market by integrating technology, proprietary software, and content into its own hardware products. This is not unlike what Apple has done so remarkably well.
During the depths of the pandemic, when the business was firing on all cylinders, the bulls were sure that Peloton was going to become a massive global fitness empire. But the unfavorable nature of the industry got in the way. It's very difficult to find lasting success in the exercise industry.
History is full of fitness fads, shiny new toys that consumers gravitate toward. And these same people tell themselves they will stick to their workout routines, which is a bad bet for a company to make.
Not only that, but the industry is also competitive. There are other internet-enabled exercise equipment manufacturers out there. And when it comes to content offerings, consumers can access free workout videos online, as well as a host of other apps available. I haven't even mentioned the more than 30,000 fitness studios that are scattered across the country.
Investors looking to scoop up the stock might change their minds now that they know Peloton's situation.
Should you invest $1,000 in Peloton Interactive right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.
