In the company's annual report for fiscal 2022 (released Aug. 25), Peloton Interactive's (PTON 3.25%) CEO commented that its current situation was akin to turning around a large cargo ship -- both require time and space to complete the maneuver, given the sheer size of the vessel (or in this case the company).

But despite the best efforts of management, Peloton's key operational and financial metrics are still slipping. And the worrying part is that fixing some of these issues might be out of management's control. 

Nonetheless, Peloton has made some positive changes that should lead to a healthier business in the future. But whether it's a growing business remains to be seen, and these two numbers are key for investors to follow.

1. Monthly active workouts per connected fitness subscriber

During the height of the pandemic, Peloton's range of at-home exercise equipment was a blockbuster. The company found a way to not only deliver the hardware to consumers but also to bring fitness classes into their living rooms thanks to its subscriptions and the interactive digital screens attached to its flagship bikes. In a locked-down society with gyms closed and outdoor activities limited, Peloton was a must-have product for fitness enthusiasts.

Not only did sales soar in 2020 and 2021 but so did engagement. Peloton subscribers were completing a record 26 workouts per month, on average, during the third quarter of fiscal 2021.

But as vaccinations rolled out and society reopened, people went back to the gym and back to work, and Peloton's business has deteriorated ever since. Engagement has suffered with monthly active workouts per subscriber sinking to a new pandemic-era low of 14.8, or 43% off their high, during the fourth quarter of fiscal 2022 (ended June 30).

A chart of Peloton's monthly active workouts per subscriber.

This is one aspect management might struggle to control. Sure, Peloton can innovate further or add more classes and content, but it can't replace an entire gym, nor is it a long-term substitute for outdoor exercise.

This is becoming evident in churn rates, which have been impressively low for Peloton in the past. In the latest quarter, monthly connected fitness churn almost doubled year over year to 1.41% from 0.73% -- in other words, significantly more members canceled their subscriptions.

If existing Peloton users are engaging with their equipment and their subscriptions so much less, it points to the possibility that demand from new customers is also set to slow down. That would imply a drop in sales and revenue, and the company is experiencing exactly that right now. 

2. Revenue

Revenue is the scoreboard for most companies, and revenue growth is the non-negotiable metric most investors watch. After all, everybody wants to own shares of a growing business. Unfortunately, that's not what Peloton has been lately. It's unreasonable to expect the company to continue generating the same financial results as it did during the worst of the pandemic, but the question is where sales will settle as communities continue to drop COVID-19 restrictions.

During fiscal 2022, Peloton's revenue shrank 10.9% to $3.5 billion, and analysts don't envision a return to growth in the new fiscal year either.

A chart of Peloton's annual revenue from fiscal 2018 to a fiscal 2023 estimate.

Peloton is working on a number of initiatives to improve sales. Most notably, it announced a major deal to sell its products through Amazon, which is the first time the company will venture out of its in-house sales channels. 

Additionally, it's offering its Bike and Bike+ under a new pricing structure called fitness-as-a-service (FaaS), where the customer pays a monthly rental fee rather than paying the entire cost of the equipment up front. The customer can cancel and return the equipment at any time or pay a buyout fee and keep it. So far, Peloton says the FaaS model is driving an increase in sales, but prices start at $89 per month, significantly more expensive than a typical gym membership.

Investors should monitor churn rates over the next 12 months before making up their minds about whether this is the way forward for Peloton. 

Peloton is running out of ocean

The most crucial thing Peloton needs to do is ensure costs are aligned with its falling revenue. The company lost a whopping $2.8 billion during fiscal 2022, and while it says it's working to shrink its expenses, it only has $1.2 billion in cash left on its balance sheet, so it simply can't afford another year like that. The ship must avoid running aground before it can complete its turnaround.

Peloton has closed all in-house manufacturing, trimmed its marketing spend, and continues to lay off employees. These are all steps toward rightsizing the company, and management believes it can achieve break-even free cash flow in the second half of fiscal 2023. That would be a very positive development, and the company might have no choice but to get there.

Is Peloton still a growth stock? The answer is no. That doesn't mean it can't reclaim the title in the future, but for now, its shrinking business simply doesn't fit the bill.