Track market-moving stories before they get noisy

Peloton Interactive (PTON -3.55%) stock went public in September 2019 priced at $29, but by the end of 2020, it had reached a record-closing high of almost $163. The COVID-19 pandemic fueled a surge in demand for the company's stationary exercise bikes, treadmills, and rowing machines, because they helped fitness enthusiasts maintain their workout routines at home.

But lockdowns and social restrictions gradually ended in 2022, and demand for Peloton's exercise equipment subsequently collapsed. The company quickly found itself losing billions of dollars per year because sales fell so sharply, threatening its very survival.

As a result, Peloton stock has plunged by 96% from its peak. But although the company continues to struggle with weak sales, its bottom line has improved significantly. Could this be the ultimate buying opportunity for investors?

Image source: Peloton Interactive.

Let's start with the bad news Peloton's annual revenue peaked at $4 billion in its fiscal 2021 (ended June 30, 2021), led by equipment sales, which accounted for $3.1 billion of that total. Five years later, the company's total revenue was down 40% to just $2.4 billion in fiscal 2026 (ended June 30, 2026), with equipment sales bringing in just $770 million -- less than one third of the total.

There are two reasons for the steep decline in hardware sales. First, demand for Peloton's at-home exercise equipment collapsed after the worst of the pandemic was over, because gyms and other training facilities quickly reopened. Even after tapping into third-party retailers like Amazon and Dick's Sporting Goods, the company has struggled to revive its slumping sales.

Second, Peloton has pivoted toward selling digital subscriptions because they carry higher profit margins than hardware, and these now account for the majority of its revenue.

There is the connected fitness subscription, which allows equipment owners to access virtual classes and performance tracking features. Then there is a separate subscription for the company's mobile app, which can be used by fitness enthusiasts who don't own any Peloton equipment. It provides them with workout plans and other basic features.

Unfortunately, the subscription business isn't doing very well, either. As of June 30, Peloton had 5.5 million connected fitness subscribers, down 8% year over year, and 503,000 app subscribers, down 9%.

With both equipment and subscription sales sputtering, management now expects Peloton to generate somewhere between $2.3 billion and $2.4 billion in revenue during fiscal 2027, representing a decline of 6% at the low end of the range. It would be the sixth straight annual revenue decline since fiscal 2021.

It seems management was caught off guard by the steep decline in equipment demand after fiscal 2021, because they positioned Peloton's costs as if more sales growth was coming. As a result, with more money going out and less money coming in, the company suffered a mind-boggling net loss of $2.8 billion during fiscal 2022.

At that point, Peloton was in a race against time to slash costs, or else it would have run out of cash and potentially not survived. Fortunately, management has turned the ship around in that respect. The company's total operating expenses were just $1.1 billion during fiscal 2026, down 68% from their fiscal 2022 peak of $3.4 billion.

As a result, Peloton just eked out an annual GAAP profit of $63.2 million. After excluding one-off and non-cash expenses like stock-based compensation, it delivered adjusted (non-GAAP) earnings before interest, taxes, depreciation, and amortization (EBITDA) of $468.2 million. Simply put, the company is no longer at risk of going under -- at least for now.

Should investors buy Peloton stock? The only way Peloton can maintain profitability is by continuing to slash costs, or by finding a way to generate more revenue. Since we know revenue is slated to fall yet again in fiscal 2027, that option might be out the window. Cutting costs is a road to nowhere in the long run, because every time management pulls money away from areas like marketing, it becomes even harder to find new customers and grow sales.

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As a result, I think Peloton is in a dangerous spiral that could wind up threatening its viability in the next few years. The company is sitting on over $1.2 billion in cash, so it has some headroom to continue experimenting with different strategies to reignite equipment and subscription sales. However, it's also carrying $944 million in long-term debt, so it doesn't have an endless amount of time to produce results.

In my opinion, it's never a good idea to invest in shrinking businesses because they tend to destroy shareholder value over time, so it might be a good idea to avoid Peloton stock.

Shares of Peloton Interactive (PTON -15.57%) fell on Thursday after the exercise equipment maker said it was struggling to stem its subscriber losses.

Image source: The Motley Fool.

Shedding subscribers, but gaining profitability Peloton's paid connected fitness subscriptions declined 8.8% year over year to 2.553 million in its fiscal 2026 fourth quarter, which ended on June 30.

Yet Peloton's revenue inched up less than 1% to $608 million, driven by price hikes intended to bolster its profit margins. The company's gross margin, in turn, increased by 2.6 percentage points to 56.7%.

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These price increases, combined with the company's cost-reduction initiatives, also helped Peloton generate positive full-year operating and net income for the first time in its history.

Additionally, Peloton produced $378 million in free cash flow, reducing its net debt by 80% to $93 million.

Subscriber losses are set to continue into fiscal 2027 Investors, however, weren't pleased to hear that Peloton expects its paid connected fitness subscriptions to decline further to 2.455 million to 2.475 million in the first quarter of fiscal 2027. That would represent a year-over-year drop of roughly 9.8%.

Still, management remains focused on profitability. Peloton projects full-year free cash flow of at least $350 million, driven by continued margin expansion.

"While multi-year transformations take time, our financial discipline has fundamentally reshaped our business and grants us greater flexibility to invest in our core strengths of premium hardware, intelligent software, and human connection," CEO Peter Stern said.

Joe Tenebruso 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.

Peloton delivered its first full year of net profit and operating income in fiscal 2026, but said it expects sales to fall in the coming fiscal year as it begins to lap price increases on its hardware and subscription plans. 

Peloton shares tumbled about 13% in premarket trading as the outlook disappointed investors. Even so, Peloton CEO Peter Stern highlighted the major strides the company has made in becoming profitable.

"This was the year where Peloton sort of grew up," Stern told CNBC in an interview, calling fiscal 2026 a "landmark" year for the company financially. "That solid foundation positions us for what we need to do to get to long-term growth to deliver on our strategy of becoming a connected wellness company and puts us in really our strongest position to date." 

In the year ended June 30, Peloton posted a net income of $63.2 million, up from a loss of $118.9 million in the year-ago period, helped in part by the brand's decision to raise prices last fall.

Looking ahead to fiscal 2027, the company expects another year of positive free cash flow. It also anticipates gross margin and adjusted earnings before interest, tax, depreciation and amortization will grow compared to the prior year.

Aside from its fiscal year, Peloton issued mixed results during its fiscal fourth quarter. 

Here's how the company performed compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

Earnings per share: 13 cents vs. 13 cents expectedRevenue: $608 million vs. $598 million expectedPeloton's reported net income for the three-month period that ended June 30 was $61.6 million, or 13 cents per share, compared with $21.6 million, or five cents per share, a year earlier.   

Sales rose to $607.7 million, up slightly from $606.9 million a year earlier. 

Though it raised prices last fall, Peloton's annual sales still fell in fiscal 2026 compared to the year-ago period. In the current fiscal year 2027, Peloton said it expects sales to fall nearly 4% to between $2.3 billion and $2.4 billion, worse than the $2.42 billion analysts had been looking for, according to LSEG. 

It shows that while Peloton has made enormous strides in becoming a stronger, more profitable business with more say over its destiny, it's still struggling to sell its pricey hardware and keep subscribers engaged and paying. 

"We are gradually improving the trajectory of our gross adds and our connected fitness sales while we're keeping churn flat," said Stern. "We're not at the stage yet where we turn the net of all those things positive, but we're getting better and better so that's basically the story of [fiscal year] '27. We're a work in progress on that one but the trajectory is getting better in '27 than it's been in a long time." 

Peloton recently hired Sarah Robb O'Hagan as its new chief content and member development officer, replacing company veteran Jen Cotter, as Peloton looks to stabilize churn, or subscribers dropping off memberships. In the role, Robb O'Hagan will focus on accelerating innovation and driving engagement and loyalty, said Stern. 

"We've kicked off a major project under Sarah focusing on member development. This looks at everything from onboarding through to the experience of live classes," said Stern.

"The other thing that Sarah's done is at the same time that we're adding new instructors, she has resigned contracts with a significant portion of our existing instructors. So we're continuing to deliver on what our members love about Peloton while also sort of challenging them to broaden their experience," he added.

Peloton is pursuing a number of new revenue streams under Stern. It recently announced a partnership with Spotify and is working to launch its first ever commercial Bike and Tread this fall, which will allow Peloton to expand into commercial gyms. Stern couldn't yet say which gyms the company might be partnering with as it just finalized pricing on the machines, but said there's been "plenty of interest." 

"We're having lots of conversations, but we're not actually making sales yet," said Stern.