Should Investors Buy Peloton Stock After Its 96% Plunge? Here's the Good News and the Bad News.

Peloton Interactive (NASDAQ: PTON) 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.

Here's the good news

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.

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.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Peloton Interactive. The Motley Fool has a disclosure policy.