Was I Wrong? This Hot Stock Has Already Doubled in 2023

I was notably bearish on shares of Peloton Interactive (PTON -4.12%) throughout 2022. The company’s sales had collapsed, and it was burning through cash with a rapidly shrinking window to turn things around. 

Current CEO Barry McCarthy joined Peloton in Feb. 2022 when the company was in crisis, and he embarked on a mission to right the ship. Now, one year later, Peloton’s financial results for the fiscal 2023 second quarter (ended Dec. 31) show strong improvement across the board.

There’s still a substantial amount of work to be done, and the company’s survival isn’t guaranteed in the long term. Nonetheless, investors have turned positive on Peloton stock, which has already doubled in 2023. Could this be the start of a sustained recovery?

The story behind the strong Q2 result

Peloton’s rise seemed unstoppable at the start of the pandemic. Consumers loved its at-home exercise equipment and virtual fitness classes as COVID-19 restrictions upended everyday routines. As a result, the company’s revenue soared in fiscal 2020 and 2021, extending its streak of triple-digit top-line growth.

But the following year, life for many people returned to normal, and sales for the company saw a stark reversal with an 11% decline for fiscal 2022. The company had also laid out ambitious expansion plans and was spending money under the assumption it would continue growing at a healthy pace, which led to substantial financial losses.

As the new CEO, Barry McCarthy’s job was to rapidly cut costs and find new ways to reignite sales. He shrank Peloton’s workforce from 9,000 to 4,000, closed its in-house manufacturing operation in favor of offshoring, and tapped new sales partners, including e-commerce giant Amazon and Dick’s Sporting Goods.

Those are just a few of management’s new initiatives, and now, investors are beginning to see the results. What follows are some of the most important details from Peloton’s second-quarter report and what the company needs to do to build on its progress.

Peloton snapped its quarterly revenue downtrend

Peloton is coming off three consecutive quarters of slumping revenue (sequentially). It reversed that trend in the second quarter, which was helped by the holiday shopping season. However, its result of $792 million blew away the company’s own guidance of $725 million (at the high end of the range).

Revenue was still down 30% year over year. This has become the new normal as Peloton adjusts to the current market, one that has largely moved on past the pandemic and features significantly more competition. But this latest report could signal a bottom, and investors might soon find out at what level the company’s revenue will stabilize.

A chart of Peloton's quarterly revenue.

Peloton’s subscription revenue topped equipment sales last quarter, which has become an important trend over the last few quarters. That’s good news for a few reasons.

First, subscription revenue is more predictable due to its recurring nature, and it also offers a higher gross profit margin. Plus, Peloton’s subscriptions are cheap, relative to the price of its equipment — which typically runs in the thousands of dollars — so the addressable market for them is inherently larger. 

Connected Fitness subscribers topped three million, up 10% year over year. That growth rate slowed from 19% in the previous quarter, but it’s promising that customers are still signing up in this difficult economic climate.

Peloton’s main challenge going forward

Subscriptions could help Peloton solve one of its biggest problems right now: net losses. As the company’s overall revenue began to drop off in fiscal 2022, it raced to cut costs in order to clean up its bottom line — which was in the red to the tune of $2.8 billion for the year.

That’s a mammoth loss on revenue of $3.6 billion, so you can understand why many investors were ready to write off Peloton’s future. It simply couldn’t afford another year like that one. But to the company’s credit, its net losses have come in at $743 million through the first half of fiscal 2023 (and falling), which is a big improvement.

But there’s work to do. The company has just $871 million in cash left, so the window to transition to profitability is narrowing.

Subscriptions, which carry a gross margin of almost 70%, combined with cost cuts like layoffs and offshoring manufacturing, could be key to getting there. Peloton’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) — which strips out one-off costs and non-cash expenses like stock-based compensation — came in at negative $155 million in the first half of fiscal 2023. That’s down from a $500 million EBITDA loss in the prior-year period, marking substantial progress.

There might be further improvement in the current quarter, according to Peloton’s guidance, which suggests its EBITDA loss could come in as low as $35 million.

This is the path to further upside for Peloton stock, now that the company has snapped its revenue downtrend. The next step is reaching profitability to show investors it’s a viable business without further capital injections.

At that point, Peloton and its new management team will have proven me entirely wrong. I might even recommend buying the stock, but for the time being, it’s likely safer to observe from the sidelines.