3 Facts About Peloton You Must Know Before Buying the Stock

What goes up, must come down. But can it come back up again?

This is precisely the path that Peloton Interactive (NASDAQ: PTON) is taking. Its shares surged 550% from their initial public offering in September 2019 to their peak in January 2021. They then tanked 98% as they hit a 52-week low in May of this year.

However, there's been a bit of a resurgence. This consumer discretionary stock has soared 219% in just over seven months, as it aims to win back investors. Before you decide to ride the momentum and buy Peloton, here are three things you need to know.

Pedaling in the right direction

One of Peloton's biggest issues in recent years has been its bloated cost structure. This unfavorable situation has been in the spotlight, particularly as the company has struggled to achieve consistent profitability.

But Peloton appears to be heading in the right direction. It has now reported two straight quarters of better-than-expected financial results. Perhaps the market was happy that losses came in lower than anticipated. In the three-month period that ended June 30 (fiscal 2024) and in first-quarter 2025 (ended Sept. 30), Peloton's income statement improved dramatically, as the business attempted to break even.

Cutting costs was the focus of previous CEO Barry McCarthy, who left the job in May. The newly appointed CEO, Peter Stern, is likely set to continue this strategy of driving a more efficient organization. But expenses can only be reduced so far before they start getting in the way of a company's potential for growth.

Demand is an issue

During the depths of the COVID-19 pandemic, Peloton was having a hard time keeping up with insatiable demand from people who were seeking ways to work out at home. In fiscal 2020 (ended June 30 that year) and fiscal 2021, the business posted remarkable revenue growth of 100% and 120%, respectively. It was as if the company could do no wrong as it completely upended the fitness sector.

It's been a wild fall-off since those times. Peloton is having a very difficult time drumming up demand for its expensive exercise bikes and treadmills. Connected-fitness subscribers, or those who purchased hardware, declined 2% year over year in Q1. Even more alarming is the fact that digital-only app members shrank 24% last quarter compared to Q1 2024. Looking ahead, management expects this worrying trend to continue in fiscal 2025.

That's certainly not an encouraging sign, especially in the key holiday shopping period. Retail partnerships with the likes of Amazon, Costco, and Dick's Sporting Goods aren't doing much to move the needle.

These struggles point to the challenges of finding lasting success in the fitness industry. Peloton not only bet that more and more households would spend four-figure sums on its equipment, but that people would stick to their exercise regimens. This hasn't worked out well.

There's also a lot of competition, particularly on the content side. This gives people many choices.

Is Peloton a value trap?

Despite Peloton shares soaring in the past several months, they still trade a gut-wrenching 94% below their record from nearly four years ago. As a result, the valuation is still dirt cheap.

The stock can currently be bought at a price-to-sales (P/S) ratio of 1.4. Historically, its valuation has averaged a P/S multiple of 4.3, so the setup today points to the market offering a discounted opportunity.

In my view, there are no signs for investors to be optimistic about this company's prospects -- an argument that a shrinking customer and revenue base supports. So, I don't believe Peloton has a bright future. The stock has the makings of a classic value trap right now.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Peloton Interactive. The Motley Fool has a disclosure policy.