Share prices of Peloton Interactive(NASDAQ: PTON) skyrocketed after the embattled company reported that it grew its revenue marginally in its fiscal 2024 fourth quarter and moved closer to profitability. The stock rose more than 35% during the trading session that followed its Q4 report's release, but the stock is still trading down more than 25% on the year.
Could this be the right time for investors to hop on the stock and take a ride?
Peloton reported a return to revenue growth
Peloton was hit with several issues over the past few years. Two of the big ones coming out of the COVID-19 crisis were inflated inventory levels and falling gross margins. The company mistook the pandemic's pull-forward in demand for a "new normal" condition. As a result, it manufactured too much inventory, which it then had to store at high costs. This led to negative gross margins on its product sales from its fiscal 2021 until fiscal 2023. In fiscal 2024, Peloton was able to reverse that.
However, revenue growth remained elusive for the company until its most recent quarter.
In fiscal 2024's Q4 (ended June 30), the company's revenue increased by 0.2% year over year to $643.6 million, topping analysts' consensus expectation for revenue of $631 million. It was the first time Peloton had seen revenue growth since fiscal 2022's Q2, which was during the holiday season of 2021. Specifically, Q4's product revenue dropped 4% year over year to $212.1 million, while subscription revenue rose 2% to $431.4 million. On a sequential basis, subscription revenue fell 1% from $437.8 million.
Meanwhile, the product segment's gross margin was 8.3%. That was a huge improvement from the negative 37.5% margin a year ago. The subscription segment's gross margin came in at 68.2%, up 100 basis points year over year. The number of ending paid connected fitness subscriptions fell by 1% to 2.98 million and was down 2% sequentially. Churn was 1.9%, versus 1.8% a year ago. Paid app subscriptions fell by 26% year over year to 615,000, and were down 9% sequentially. Average monthly paid app churn was 8.4%.
Overall, adjusted EBITDA came in at $70.3 million, a huge improvement from the loss of $34.7 million a year ago and a big increase from the $5.8 million in EBITDA it generated in fiscal Q3. Its net loss, meanwhile, narrowed to $30.5 million from $241.8 million a year ago
Operating cash flow was $32.7 million, while free cash flow was $26 million.
Peloton management forecasts that fiscal 2025 Q1 revenue will come in between $560 million and $580 million, a 4% year-over-year decrease at the midpoint. It is looking for adjusted EBITDA of $50 million to $60 million, which would be a 500% improvement at the midpoint. It expects paid connected fitness subscriptions to decrease by 3% year over year to between 2.88 million and 2.89 million users, and paid app subscriptions to decline by 26% to between 560,000 and 570,000.
For the full fiscal year, management projects revenue will fall by about 9% at the midpoint to between $2.4 billion and $2.5 billion. But it expects adjusted EBITDA to soar from $3.5 million to between $200 million and $250 million. Paid connected fitness subscriptions are expected to decline by 9%, while paid app subscriptions are projected to fall by 3%. It also projected free cash flow of $75 million.
Image source: Getty Images
Is it too late to buy Peloton stock after the rally?
Peloton is doing a lot of good things to help right its business. It is in the midst of reducing its cost structure by $200 million, which will help power its EBITDA gains next year. It has also pulled back on its media spending, and it plans to optimize its marketing spending this fiscal year to continue to improve customer acquisition efficiency.
Meanwhile, it has inked content licensing partnerships with Lululemon and Alphabet's Google Fitbit to help expand its subscriber base and drive subscription revenue. It also hopes to benefit from secondary market sales by implementing a $95 used product activation fee, and it continues to lean into rentals with its Bike+ rental program.
On the hardware, wide, Treadmill sales were strong, growing 42% in the quarter; this market represents a nice opportunity for the company. Peloton will also continue to look to improve the segment's gross margins by cutting back on discounting.
The stock currently trades at a forward enterprise-value-to-EBITDA multiple of 18. That's an accomplishment in itself, since until recently, Peloton didn't have positive EBITDA. Meanwhile, it has turned free cash flow positive, which is important given its debt load.
PTON EV to EBITDA (Forward) data by YCharts.
That said, investors should probably continue to take a cautious approach to the stock. Major problems at the company have been fixed, but its revenue growth is still modest and its subscriber numbers are still on the decline. The company also still carries a fair amount of debt.
Its guidance for fiscal 2025 looks relatively conservative, which is good, and the board is still looking for a new CEO. However, for the company's results to improve, the economy will have to cooperate.
As such, I think interested investors could take a small speculative position in the stock as Peloton continues its turnaround efforts, but I wouldn't suggest going full throttle into the stock.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Lululemon Athletica, and Peloton Interactive. The Motley Fool has a disclosure policy.
