Shares of Peloton Interactive (NASDAQ: PTON) have been taking off of late. After reporting stronger-than-anticipated quarterly results, investors have suddenly turned bullish on the stock. In just the past month, Peloton's stock has rallied by more than 40%.
Has the company given investors a reason to reconsider the stock as a growth investment, or is this likely to be nothing more than a short-lived rally?
Peloton shows improvement on the top and bottom lines
A strong earnings report can turn the tide for a stock in either a good way or a bad way. Peloton's turnaround seems to be progressing well.
For the first time in more than two years, sales are growing. Revenue for the period ending June 30 totaled $643.6 million and was up ever so slightly from the $642.1 million the company reported in the prior-year period. The bump is smaller than 1%, but it's positive growth nonetheless.
PTON Revenue (Quarterly YoY Growth) data by YCharts
Another positive is that the company has been slashing expenses, and while its revenue may not be up significantly, its gross profit increased by 55% to $312 million. Peloton still incurred an operating loss of $63.3 million, but that was a big improvement from the $225.8 million loss it reported in the prior-year period.
For the full fiscal year, the company also drastically slowed its rate of cash burn. It used up $66.1 million over the past 12 months from its day-to-day operating activities, which is significantly less than the $387.6 million it used up last year.
The company still has a lot of work to do
The recent quarterly results were positive, but it's far too early to say that the company is back to growing and that all its problems are behind it. Peloton's bikes cost well over $1,000, making them unaffordable for most consumers, especially when many are still struggling with inflation and with a possible recession on the horizon.
The company may have grown its revenue, but the number of paid app subscriptions at the end of June was down 26% year over year to 615,000. And the number of total members fell by 2% to 6.4 million. Declines in paid subscriptions and overall member count could be signs that Peloton's revenue will go down in future quarters.
And it's also important to note that while the business grew its top line this past quarter, it's from a much lower base than Peloton had several years ago. Two years ago, the company's revenue came in at just under $679 million. And the year before that, revenue for the June quarter topped $937 million. So over the past two years, Peloton's sales are down 5% and compared to three years ago, they have declined by 31%.
Is Peloton stock a buy?
While there were definitely positives in this latest earnings report, investors should be careful not to get ahead of themselves and assume that the worst is over for the consumer discretionary stock. The business is still unprofitable, its growth wasn't all that impressive, and its user count was down from the previous year.
Once you consider potentially worsening economic conditions and that many consumers are still struggling with inflation, it's hard to see a way things get better for Peloton. A narrowly growing top line and shrinking losses are positives, but hardly overwhelming reasons to believe that the business is worth taking a chance on right now.
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David Jagielski 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.
