Connected fitness leader Peloton Interactive (NASDAQ:PTON) should have put to rest any doubts about its ability to cycle through adversity this quarter, but despite a strong holiday showing, its latest earnings report caused its stock to tumble.

The maker of high-end stationary bicycles and treadmills easily beat analyst revenue and earnings estimates as new subscriber numbers soared, but because its guidance for current quarter sales was below what Wall Street expected, its stock dropped 15% over the two days following the report.

Man running on treadmill

Image source: Getty Images.

Looking fit and trim

By all accounts, the Christmas season showed Peloton has legs. Numbers of connected fitness subscribers, which looked like they were beginning to stall last quarter, sprinted ahead and nearly doubled in number this time around.

Peloton added 149,000 new subscribers to its rolls sequentially, growing 94% year over year. Because it only added 52,000 subscribers in the fiscal first quarter -- down from 54,000 in the fourth -- some analysts feared it was losing steam. But the latest results showed that might simply have been a seasonal issue given the strong holiday-quarter performance.

Chart of Peloton's quarterly connected fitness subscribers

Data source: Peloton Interactive. Chart by author.

The big gains could also be due to the numerous actions Peloton has taken to make its classes more accessible.

Untethering subscriptions from its equipment

Although there are still mandatory subscriptions required when you purchase one of its pricey machines, the connected fitness guru has also made itself available to people without one of its spinning bikes or treadmills.

It also lowered the cost of one of those unattached subscriptions and released an app for the Apple Watch to help people track their fitness progress. CEO John Foley told analysts, "[O]ver 30% of the classes taken by our connected fitness subscribers were non-cycling classes." That also helped reduce customer churn, which fell to 0.74% after peaking at 0.9% in the fiscal first quarter.

Those are still exceptionally low numbers, but the fact that they were rising was causing concern Peloton would suffer ever-growing numbers of defections as competition increased from rivals like SoulCycle parent Equinox and Nautilus, which are seeking to develop their own similar connected fitness classes. Workout apps from the likes of Nike and others could also increase pressure.

Easing off the pedals

Subscribers don't appear to be leaving just yet, but investors were apparently concerned that Peloton was only guiding fiscal third quarter revenue to a range between $470 million and $480 million, well below Wall Street's forecast of $494 million.

At the mid-point, Peloton's guidance would be a 50% increase over last year, which is a gradual slowdown in the rate of growth that it has been experiencing. Revenue of $466 million this quarter was 77% higher than a year ago. It also reinforces for some the belief that there is a finite market for Peloton's expensive exercise equipment and that it will soon run up against the ceiling.

In addition to lowering the cost of the unattached fitness class subscriptions, Peloton is reportedly planning on introducing new, lower-cost equipment, like a cheaper treadmill and rowing machine.

Speeding to the future

Peloton's full-year outlook, however, should give investors some cause for hope. It says it expects 2020 revenue to rise to as much as $1.55 billion, substantially above the consensus analyst estimate of $1.49 billion, and it increased the number of connected fitness subscribers it plans to have at the end of the year. It now says there should be between 920,000 and 930,000 subscribers, compared to its prior belief of 895,000.

Much as was the case before, though, as good as Peloton's business is and as much of the market leader as its connected fitness program is, the exercise equipment maker's stock remains expensive.

Although shares are well off their highs since going public, Peloton's stock is still up double-digit percentages  year to date and it trades at almost nine times sales. In comparison, Nautilus is valued at just a tiny fraction of its revenue, albeit being a company struggling to make a turnaround.

There may be a time when Peloton Interactive's stock is a buy, but investors would be wise if they exercised due caution and waited for another time to buy the fitness tech specialist.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.