Don't Be Fooled by Peloton's "Turnaround"

If you wanted to know what rock-bottom expectations look like, take a gander at Peloton 's (NASDAQ: PTON) most recent quarterly report. The connected fitness company, rudderless after former CEO Barry McCarthy left in May, managed to break its streak of revenue declines and slash its net loss. Analysts were expecting a significant slump in sales and a much larger loss, and the stock responded by surging as much as 30% on Thursday.

The story, though, hasn't changed. The company is being led for now by two of its board members, and aggressive cost cutting is acting as a stand-in for a real long-term strategy. Cost cutting is certainly necessary given the excess that accumulated during the company's pandemic-era heyday, but where revenue growth is supposed to come from remains a mystery.

Revenue is still in decline

Peloton managed to boost its revenue by 0.2% year over year in the fourth quarter, its first quarter of growth in over two years. Unfortunately, this isn't the start of a trend. The company expects revenue to drop by 4% year over year in the first quarter of fiscal 025 and by a whopping 9% in the full fiscal year.

Part of the reason for the weak guidance is that the company is now focused on profitability rather than growth. Here's the problem: Peloton has a market capitalization of about $1.6 billion as of midday Thursday, and that valuation is tough to justify if a return to revenue growth is years away at best.

Peloton expects to produce around $2.45 billion in revenue during fiscal 2025. Revenue from connected fitness products is set to to decline, and the company also sees the number of subscribers falling across the board.

Subscription troubles

Peloton has two distinct subscription businesses. First, there's the connected fitness subscription product that is tightly coupled with the company's bikes and treadmills. Second, there's the stand-alone app that doesn't require the purchase of Peloton hardware. Neither is doing well.

Peloton expects its subscriber count for the connected fitness product to drop by 9% in fiscal 2025, and for its app subscriber count to decline by 3%. The company needs to sell more equipment to drive connected fitness subscription revenue higher, but it's not doing that. Churn is relatively low, but the membership base is still in decline as equipment sales deteriorate.

The app subscription business has much higher churn, which makes sense since it's not tied to a pricey exercise bike. Peloton is hemorrhaging app subscribers, losing 26% of its subscriber base on a year-over-year basis in the fourth quarter.

The company's plan is to improve the subscriber experience in the hopes of reducing its churn, although it's not making any promises. "While we are optimistic we can improve engagement through product and content innovation and evolving our marketing strategy, the timing of when we will start to see a meaningful benefit from these efforts is uncertain," reads the fourth-quarter letter to shareholders.

Not an appealing turnaround story

It's hard to imagine a future where Peloton's expensive home exercise equipment comes back into vogue. There's a lot more competition today, and the pandemic-era tailwind of people avoiding gyms and classes is long gone.

The app subscription business has been a big letdown. Peloton expects to end fiscal 2025 with around 600,000 app subscribers, down from 620,000 at the end of fiscal 2024. The company is struggling to sell equipment while also struggling to hook equipment-less subscribers on its low-cost app.

Peloton needs a new CEO and a new strategy. Without either, betting on a turnaround is a risky proposition.

Timothy Green 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 .