Peloton (PTON)

Exercise equipment company Peloton (NASDAQ:PTON) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 13.1% year on year to $624 million. The company’s outlook for the full year was close to analysts’ estimates with revenue guided to $2.46 billion at the midpoint. Its GAAP loss of $0.12 per share was 97.4% below analysts’ consensus estimates.

Company Overview

Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.

Consumer electronics companies aim to address the evolving leisure and entertainment needs of consumers, who are increasingly familiar with technology in everyday life. Whether it’s speakers for the home or specialized cameras to document everything from a surfing session to a wedding reception, these businesses are trying to provide innovative, high-quality products that are both useful and cool to own. Adding to the degree of difficulty for these companies is technological change, where the latest smartphone could disintermediate a whole category of consumer electronics. Companies that successfully serve customers and innovate can enjoy high customer loyalty and pricing power, while those that struggle with these may go the way of the VHS tape.

Competitors offering at-home fitness products and online workout classes include Nautilus (NYSE:NLS), Lululemon (NASDAQ:LULU), and Planet Fitness (NYSE:PLNT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Peloton grew its sales at a 11.9% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Peloton’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 5.6% annually.

We can dig further into the company’s revenue dynamics by analyzing its number of connected fitness subscribers, which reached 2.88 million in the latest quarter. Over the last two years, Peloton’s connected fitness subscribers averaged 1.1% year-on-year declines. Because this number is higher than its revenue growth during the same period, we can see the company’s monetization has fallen.

This quarter, Peloton reported a rather uninspiring 13.1% year-on-year revenue decline to $624 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to decline by 4.2% over the next 12 months, similar to its two-year rate. Although this projection is better than its two-year trend, it's hard to get excited about a company that is struggling with demand.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Peloton’s operating margin has risen over the last 12 months, but it still averaged negative 15.7% over the last two years. This is due to its large expense base and inefficient cost structure.

This quarter, Peloton generated a negative 5.2% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Peloton’s full-year earnings are still negative, it reduced its losses and improved its EPS by 34.8% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Peloton reported EPS at negative $0.12, up from negative $0.45 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Peloton’s full-year EPS of negative $0.44 will reach break even.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Peloton broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Peloton’s free cash flow clocked in at $94.7 million in Q1, equivalent to a 15.2% margin. This result was good as its margin was 14 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Peloton’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 9.4% for the last 12 months will increase to 10%, giving it more flexibility for investments, share buybacks, and dividends.

Peloton reported $914.3 million of cash and $1.99 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $333.9 million of EBITDA over the last 12 months, we view Peloton’s 3.2× net-debt-to-EBITDA ratio as safe. We also see its $99.9 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Peloton beat analysts’ EBITDA expectations this quarter. On the other hand, revenue was just in line and its full-year EBITDA guidance fell slightly short of Wall Street’s estimates. Overall, this was a softer quarter, and the market needs more convincing performance from this turnaround. The stock traded down 8.2% to $6.41 immediately following the results.

Updated: May 10, 2025 at 10:16 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Peloton.

Peloton doesn’t pass our quality test. For starters, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its Forecasted free cash flow margin suggests the company will have more capital to invest or return to shareholders next year, the downside is its number of connected fitness subscribers has disappointed. On top of that, its projected EPS for the next year is lacking.

Peloton’s EV-to-EBITDA ratio based on the next 12 months is 7.3x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $8.89 on the company (compared to the current share price of $6.13).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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