Why Peloton Stock Surged Higher, Then Sank Today

Key Points

• Peloton's margin profile continues to improve dramatically.

• Management announced that there is a possibility the company will return to sales growth in 2026.

• Peloton remains 6 million members strong, despite its fall from grace after the pandemic.

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Shares of leading connected fitness stock Peloton Interactive (NASDAQ: PTON) rose as much as 14% before reversing to a 1% decline as of noon ET on Thursday, according to data provided by S&P Global Market Intelligence.

Peloton posted a surprise profit during its fourth-quarter earnings call, rocketing past analysts' expectations.

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Although sales dipped 6%, gross profits grew 5%, and free cash flow (FCF) quadrupled, suggesting that its turnaround may be taking hold.

Streamlining, streamlining, streamlining

Priority No. 1 for the Peloton turnaround has been to become a streamlined version of its old self. While this has been in the works for multiple quarters (years now, even), Peloton's results for the fiscal fourth quarter, ended June 30, show that this work may be starting to pay off.

Equipment gross margin more than doubled from 8.3% to 17.6% over the last year. Meanwhile, its subscriptions segment gross margin rose from 68% to 72%.

With these high-margin subscription sales now accounting for two-thirds of Peloton's revenue, the company could become steadily profitable if it can reverse the persistent customer churn figures it has seen since the pandemic.

Image source: Peloton.

Still 6 million members strong -- with 2.8 million paid connected fitness subscriptions -- Peloton guided for a 6% customer churn rate for the first quarter of 2026. However, management's full-year guidance has total revenue only dipping 2% at the midpoint, signaling that there's a chance Peloton returns to sales growth this year.

Furthermore, the company expects to generate at least $200 million in FCF in 2026 -- a tidy sum for a $2.8 billion company.

Eyeing an international launch as its U.S. operations stabilize, Peloton's turnaround story is worth watching at 11 times FCF. However, with stock-based compensation equal to 10% of Peloton's market cap, I'd love to see this figure reined in before I buy.

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Josh Kohn-Lindquist 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.