Peloton Interactive (NASDAQ: PTON) is once again making headlines. However, this time it was a positive reaction from the market, which hasn't happened many times for the company in recent years.
The fitness innovator reported fiscal 2024 fourth quarter (ended June 30) results last week. Shares immediately popped almost 40% on the day of the announcement. Perhaps the market is becoming more optimistic about the troubled company.
Should investors buy this beaten-down consumer discretionary stock right now?
Exceeding Wall Street expectations
Investors were pleased with two key numbers from Peloton's financial update. The first was the sales figure of $643.6 million, which represented a 0.20% gain compared to Q4 2023. This was the first time revenue was up on a year-over-year basis in nine quarters.
The second metric probably relates to decreasing losses. Peloton reported a net loss of $30.5 million in the fourth quarter. That was a major improvement from the $241.8 million net loss posted in the year-ago period.
Even slight improvements for such a struggling enterprise can have huge benefits for the stock price. That's especially true in this case, since expectations for Peloton have been so low. Even after the surge, shares trade at a dirt cheap price-to-sales ratio of under 0.7.
Hit the brakes
Investors might view the latest results as the first step toward improving the business and, consequently, better returns. However, before you rush to buy the stock, I think it's best to hit the brakes on this bike ride.
Peloton's total revenue was barely higher than the year-ago period. Yes, this could be a sign that maybe the worst days are behind us, but it's hardly any reason to cheer. Making matters worse, the management team, led by two board-member interim CEOs, predicts that sales will drop 9% in the current fiscal year.
That's not encouraging, and it clearly shows that tougher times are ahead. It's also worrying that Peloton is losing subscribers, revealing waning consumer interest.
Assuming the market was ecstatic about Peloton improving its bottom line, I'm not as impressed. It's smart to have a critical eye toward the company's profitability.
Peloton generated $26 million of free cash flow. But consider that the business paid out $311.7 million in stock-based compensation during the quarter. This is a non-cash expense, but it's an expense, nonetheless.
And when it comes to the $70.3 million of adjusted EBITDA ( earnings before interest, taxes, depreciation, and amortization ) that was produced, I view this as a terrible gauge of profitability. It excludes many important costs. Peloton still leaves much to be desired when it comes to the income statement getting in better shape.
No growth prospects
Peloton's leadership team touts reducing expenses. That might be encouraging, but consider what exactly is being cut. In Q4, Peloton's sales and marketing expenditures were down 19% year over year. "We expect continued year-over-year reductions in sales and marketing spend throughout fiscal year 2025," the shareholder letter reads. The business also spent less on research and development.
I view this as a short-term solution, providing a one-time positive bump for the bottom line. With attention on the long term, though, lowering these costs is the worst thing a company can do if it's trying to grow. This tells me that Peloton really is de-prioritizing expanding the business right now.
That's a huge problem. Ever since the worst days of the pandemic passed and consumer behavior normalized, Peloton has struggled mightily to drive demand for its fitness equipment and subscriptions. This challenge will continue, which is yet another reason to avoid the stock.
Neil Patel and his clients have 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 .
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