This Fitness Stock Just Had a Banner Month. Does That Make It a Buy?

Since peaking in early 2021, share prices of connected-fitness company Peloton Interactive (PTON -0.97%) have plummeted a gut-wrenching 94%. To any investor who's held since the top, this is quite literally one of the worst declines you can possibly experience as an investor. 

These wretched returns suggest Peloton is a business in total decline. And yes, the company does have important challenges to overcome. However, you'd probably never guess it just had a record month. And yet that's exactly what just happened for one part of Peloton's business.

Peloton's record adoption

According to estimates from third-party analytics company AppFigures, revenue for Peloton's app hit an all-time high in May. Peloton has multiple parts to its business. It sells exercise hardware. But it also sells an ongoing subscription service to unlock content and features for the hardware. If you're a connected-fitness subscriber (meaning you have hardware and pay for the subscription) you get automatic access to Peloton's exercise app. But you can pay for a subscription to the app without owning hardware.

Peloton's management has long acknowledged that the app has been an effective marketing tool. People who start out with a cheaper subscription to the app (called Peloton Digital subscribers) often eventually upgrade to a hardware device and the pricier connected-fitness subscription as they fall in love with Peloton's content.

These days, Peloton is under the management of new CEO Barry McCarthy. But like his predecessor, McCarthy continues to recognize and emphasize the importance of the app for the company's future growth. Peloton's most recently completed quarter was the third quarter of fiscal 2022, which ran from January through March. In the Q3 letter to shareholders, McCarthy said the team is "rethinking the value proposition of our digital app to drive significantly more top of marketing funnel growth."

Later in the letter, McCarthy said, "The digital app needs to become the tip of the spear, so to speak, if we're going to reach 100 million members."

Peloton's undeterred long-term vision

Keep in mind that Peloton hasn't been shedding members despite its dramatic 94% stock-price decline. In fact, since going public, its total connected-fitness subscriber base has increased sequentially every quarter. And management is predicting further growth, albeit modest, in the coming quarter.

Source: Peloton quarterly shareholder letters. *Note: Membership totals are approximate. YOY = Year over year.

For this reason, Peloton's management is resolute in its long-term vision of having 100 million members. Peloton currently has around 7 million members (multiple same-household members can be on a single subscription). So the long-term goal is still quite large. And the app will be a big part of achieving this ambitious goal.

This brings me back to AppFigure's data. The company estimates that Peloton generated $6 million in May revenue from its app after paying its fees to Apple and Alphabet's Google. For perspective, Peloton's app revenue in May was up 42% when compared to January. In short, this is sensational news for a company that's expressly prioritizing growth in its app business.

Is Peloton a buy?

On a net basis, Peloton is still adding subscribers. And management believes the app will serve as a driver of future connected-fitness subscriber growth. Given the record month the app just had, this is great news.

However, I don't believe these positives make Peloton stock a buy today -- there are better options. The better takeaway for Peloton is there's ongoing strength to the business.

In my opinion, the stock is primarily down due to managerial missteps -- specifically, dramatic inventory oversupply and really bad cash management. These issues aren't easily fixed and keep me from calling Peloton a buy today.

For perspective, Peloton's hardware sales are slumping and inventory was up over 50% year over year in Q3 -- a bad combination. And through the first three quarters of fiscal 2022, the company has a $1.5 billion loss from operations compared to net income from operations of $114 million during the comparable period of fiscal 2021.

Peloton founder John Foley relinquished the CEO position to McCarthy in February. And this month, CFO Jill Woodworth will be replaced. In other words, there are new sheriffs in town. And this team is actively seeking to correct previous mismanagement. 

However, I believe investors should approach Peloton's turnaround attempt with caution. The company has a long way to go. And this new management team will need to establish credibility with investors, which will simply take time.

That said, I do believe Peloton is a company investors should keep on their watch lists for now. There are positive developments happening with the business that could form building blocks to sustain this turnaround story over the long term.