Could Peloton Help You Become a Millionaire?

Peloton Interactive (NASDAQ: PTON) was a household name during the coronavirus pandemic. Consumers were lined up to buy the company's connected exercise equipment. But the company's fortunes have turned for the worse. Is there a chance that it could get back the old magic and turn shareholders into millionaires?

Peloton and Wall Street wisdom

There's a saying on Wall Street about how dangerous it is to try to catch a falling knife. That saying speaks to investors that see a steeply falling stock price and think that, maybe, there's huge turnaround potential. Sometimes, there is. But usually a troubled company is just a troubled company. This is why most investors shouldn't try to invest in turnaround stocks .

Image source: Getty Images.

Peloton is a turnaround stock. The story here is unique to the company, but the theme is repeated quite frequently on Wall Street. A company creates a product that catches the attention of consumers. The product fad leads to huge demand and investors extrapolate the demand too far into the future, envisioning the potential for huge sales and earnings . The stock of the company rockets higher.

Then competitors start to create me-too products. And demand doesn't prove to be quite as resilient as thought. The fad begins to fade and so, too, does Wall Street's love for the stock. Suddenly a company that was expected to grow to the sky isn't doing so well, perhaps it even starts losing money...and more money. Investors begin to flee in fear, pushing the stock down further and further.

PTON data by YCharts

Look at the chart for Peloton above and you can easily see the broad story outlined in the price movements. Peloton's version of the story is unique to Peloton, but the general theme is the same as it was for, say, SodaStream not too long ago (SodaStream ended up selling itself to PepsiCo ). The question today, however, is whether or not there is really turnaround potential from here for Peloton.

Peloton is rudderless

The last big push for Peloton was to shift its business model from making connected exercise equipment to selling an exercise subscription service. Subscriptions tend to be fairly high-margin offerings because you create content once and then sell it over and over again. The idea behind this shift, given that subscriptions were a key part of the connected equipment story, was reasonable.

However, it simply didn't work out as well as hoped. In the fiscal third quarter of 2024, the number of paid app subscriptions fell 21% year over year. The number of subscriptions related to the company's exercise equipment was much stronger; it was flat. Still, neither of those numbers represents a particularly good outcome, and the CEO that orchestrated the subscription idea stepped down the same day that fiscal third quarter 2024 earnings were released.

To be fair, Peloton has made some important moves since that point, including refinancing debt that was set to mature soon. But that required the company to go from debt with a zero coupon, sold when the Peloton fad was in full swing, to debt with actual costs associated with it. To put a number on that, Peloton paid off $800 million of zero-coupon convertible debt and took on $350 million of convertible debt with a 5.5% interest rate.

While Peloton needed to push out its debt maturities and find a way to reduce overall leverage (the convertible issuance was part of a larger restructuring), going from zero interest costs to 5.5%, even on a smaller balance, will just make it harder for the company to become profitable.

But there's a longer-term problem here that still hasn't been addressed. Given the departure of the CEO, likely because the subscription idea didn't work out, what's Peloton's business model? Until there's a new leader in place, the company is really operating without a plan. There's no way to assess Peloton's turnaround potential if there's no plan.

Peloton's next earnings reports could be ugly

Peloton is set to report fiscal fourth-quarter 2024 earnings on Aug. 22. Maybe it will announce a new CEO at that point, maybe not. But the company's financial results are unlikely to be good either way since its big subscription push has fallen flat. And whenever a new CEO comes in, hopefully sooner rather than later, investors need to be prepared for a direction shift that will take time to gain traction. It might even take a little while for a new CEO to come up with a plan, since they'll probably be new to the company.

That likely means more bad news from earnings over the next couple of quarters, at the very least. And it also means there's no way for investors to really tell if there's legitimate turnaround potential that could turn Peloton into a millionaire maker. Sure, if the stock got back to its previous highs the turnaround appeal would be massive. But at this point, most investors should avoid the stock because there's no clear path toward such an outcome today. The risk/reward balance remains tilted in the wrong direction for now.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy .