Peloton Interactive (PTON 1.46%) had a heck of a price advance when it reported fiscal fourth-quarter 2024 earnings on August 22nd, with the shares rocketing higher by a huge 40% or so. On the surface that sounds exciting, but when you dig into the story a little bit more, the exercise equipment maker remains a troubled company. Here's why this stock is only appropriate for aggressive investors.
The Peloton rally
That huge price increase in Peloton's shares basically happened in one day. That's a shocking price increase in a very short period of time and should instantly raise question marks for investors. The reason for the rally was the company's fiscal Q4 2024 earnings release, which seems like it must have been pretty good given the market's reaction.
Image source: Getty Images.
But it really wasn't. Yes, the company generated positive adjusted free cash flow and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). But those are non-GAAP numbers, so you have to take them with a grain of salt. The company also managed to refinance debt that was set to come due, solidifying its financial situation. But the effort required going from debt with a super-low interest rate (notably a convertible bond with a zero coupon) to debt with rates of 5.5%. It was important to deal with the balance sheet, but this will lead to higher costs, not lower costs.
Overall, the "positive" news that led investors to rush into Peloton's stock was really mixed, at best. Peloton definitely looks like it is on a better financial footing than it was not too long ago, but its foundation certainly isn't strong.
NASDAQ: PTON
Key Data Points
Big problems persist at Peloton
For example, despite the adjusted numbers, Peloton still lost money on a GAAP basis. The red ink in the quarter tallied up to $0.08 per share. To be fair, that was a huge improvement over the loss of $0.68 a share the year before, but the change was largely driven by cost cutting. It isn't bad to trim some fat, but even troubled companies can only trim so much fat before they hit meat, or worse, bone.
The real issue here, however, is that the cost-cutting was done by co-CEOs who are acting as a stopgap until the company can find a new permanent CEO. In other words, Peloton's future business direction is, at best, up in the air right now. When a new leader is finally brought in, they will have to create a plan, and that plan might -- in fact, will likely -- require some sort of investment in the business. That will mean more spending.
The need to invest in the business is a virtual given, as well. That's because the company's core exercise equipment operation is stagnant, and the new subscription app the outgoing CEO was pushing is floundering. The evidence on both accounts comes from the subscription numbers. Peloton's connected equipment subscriptions dropped 1% year over year in Q4, while the app lost a troubling 26% of its subscriber base year over year. The next CEO is not inheriting a thriving business.
Peloton is a turnaround story, and a tough one at that
Peloton's business has been troubled for a long time. The company and stock rose to prominence on Wall Street because of demand driven by a unique event, the coronavirus pandemic. The good times are long gone for Peloton and it is now, basically, trying to find a way to survive over the long term.
Yes, the fiscal Q4 numbers were an improvement for Peloton. But they were merely less bad, not good. Until there's a new CEO and a new corporate direction, it is very hard to know what the future will hold. Only the most aggressive investors should be investing in this turnaround play.
