Shares of Peloton Interactive (PTON 2.69%) have sent investors on a roller coaster ride since it listed publicly in September 2019 at $29. When the pandemic struck six months later, social restrictions sent demand soaring for the company's at-home exercise equipment and virtual fitness classes.

Its stock subsequently exploded to an all-time high of $162.72. But with life mostly back to normal now, Peloton's sales have slumped, and the stock now trades 91% below that mark at just $13.63 -- which means investors in its initial public offering (IPO) are also underwater. 

But Peloton now has a brand-new CEO, Barry McCarthy, and a new operating strategy that is already yielding results. The road ahead, however, is filled with challenges, and the company just suffered a setback in a long-standing legal battle over its video-streaming technology.

Does an opportunity exist for investors in Peloton stock, or are the company's hurdles simply too high? Let's explore.

Peloton is hit with an import ban

Peloton's ability to stream fitness content to its users in real time, and at the highest possible quality, is a core feature of its business. Without that, its products stand level with most other run-of-the-mill fitness hardware without digital capabilities. 

But Dish Network, a television and satellite provider, claims the technology underpinning the streaming abilities in Peloton's products infringes on four of its patents. In September 2022, the U.S. International Trade Commission agreed, and on March 8, it decided the import of streaming devices produced by Peloton will be banned in 60 days. Fitness company iFit (which owns NordicTrack) was hit with a similar restriction.

Peloton (via Reuters) says the ruling will in no way affect its services for existing users, but it's unclear how the problem is being solved for the sale of new products to American customers. The lawsuit originated in 2021, so it's possible the company had enough runway to make adjustments to the affected technology since then. If not, it only has 60 days to find a solution -- though it can still sell its hardware outside the U.S.

It used to manufacture its hardware in the U.S., but in an effort to cut costs, it began to outsource to producers in Taiwan. Hence, the coming import ban into the U.S. could trigger supply issues if an alternative solution isn't found for American consumers.

Peloton faces even greater short-term challenges

Below is a chart of Peloton's net losses going back to the third quarter of fiscal 2021. The company's fiscal year ends on June 30 each calendar year.

As the worst of the pandemic subsided, vaccines rolled out, and social restrictions lifted, the chart shows how the company's bottom-line results began to crater. Peloton thought its powerful sales growth during 2020 and 2021 would continue into 2022, but as life returned to normal, demand collapsed for at-home exercise equipment.

As a result, revenue began to decline, and all the money it invested in inventory and marketing to prepare for more growth bled into red ink in the form of net losses. This is what McCarthy has been tasked with fixing since taking on the top executive job in February last year.

A chart of Peloton's quarterly net losses.

Besides outsourcing manufacturing, he slashed more than half of the company's workforce and cut marketing costs. To offset a decline in sales driven by a smaller marketing budget, Peloton tapped new sales channels through Amazon and Dick's Sporting Goods

The strategy appears to be working. In the fiscal 2023 second quarter, revenue came in at $792 million, which was above its first-quarter result and beat the company's own expectations. It also arrested three consecutive quarters of decline on a sequential basis.

In addition, the company's net loss shrank to $335 million, the best level in six quarters. And after making a series of adjustments, like stripping out one-off settlement payments to suppliers, Peloton managed to actually generate positive free cash flow of $8 million, which is an incredible milestone given the steep losses in the rearview mirror. 

But Peloton is running out of road

Peloton is racing its own balance sheet. It has only $871 million in cash on hand, so losing over $300 million a quarter creates a significant risk that the company runs out of money before it can achieve true profitability on the basis of generally accepted accounting principles (GAAP), before making adjustments.

The good news is that Peloton continues to see steady growth in its connected fitness subscriptions for virtual classes, which carry a high gross profit margin. The segment grew by 10% year over year in the second quarter to 3.03 million subscribers, and it generated the majority of the company's revenue overall -- beating its hardware segment.

Combined with ongoing expense management, continued subscriber growth will go a long way to improving the company's bottom line further. 

For investors with a risk appetite that sits at the high end of the spectrum, the stock might be worth a small position, because if the company hits profitability, the upside could be rewarding. For investors who own it already, the company has made enough progress that holding on makes sense for now -- though keep in mind the key unknown at the moment, which is the potential impact of the import ban. 

But for all other investors, it might be safer to wait on the sidelines until the company proves it can survive on its own and achieve profitability without requiring more money -- which could come in the form of high-interest loans, or an equity raise resulting in current shareholders being diluted.