Peloton Interactive Inc. has recently made headlines for surpassing market expectations in its annual core profitability outlook, as indicated in a note from Morgan Stanley. Although the company's guidance for connected fitness subscriptions appears weak, suggesting a focus on cost-reduction initiatives, the overall fiscal performance has shown unexpected positive growth in the fourth quarter. In its latest shareholder letter, Peloton announced that its revenue for the fiscal fourth quarter experienced a surprising uptick, marking a 'modest' annual gain for the first time since the fiscal second quarter of 2022.
This shift has led the company to project adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ranging between $200 million and $250 million for the fiscal year 2025. Morgan Stanley, along with Wall Street analysts, had expected figures of $189 million and $108 million respectively, illustrating that Peloton's outlook suggests it is nearing 'sustainable' profitability.
However, this growth is largely attributed to a decrease in investments aimed at expanding growth initiatives, particularly in light of the anticipated decline in connected fitness subscriptions over the next year. With guidance indicating a 9% decrease in both full-year revenue and ending paid connected fitness subscriptions from the previous year, expectations of growth being 'roughly flat' for both metrics have been managed downward.
Morgan Stanley has pointed out that the company’s cost decisions coupled with macroeconomic pressures have likely led to this disappointing growth outlook. Particularly striking is the guidance around connected fitness subscribers, suggesting a significant reduction at the top of the sales funnel. On the stock market, Peloton shares saw an increase of 6.3% during Friday's afternoon trading, building off a 35% gain established in the prior session.
Despite these increases, the company’s stock remains down by 20% for the year. In the realm of cash flow, Peloton achieved $26 million in free cash flow during the fourth quarter, marking the second consecutive quarter of positive performance in this area—an achievement not realized since the second quarter of fiscal year 2021.
Chief Financial Officer Liz Coddington remarked during an earnings call that the company is actively working towards achieving $200 million in annualized cost savings by the conclusion of fiscal 2025. Morgan Stanley noted that a crucial element influencing Peloton's long-term free cash flow generation potential is its connected fitness subscriber base, which is projected to experience a year-over-year drop for the first time in 2025.
Analysts clarified that for a positive turnaround, there must be solid conviction in Peloton's ability to stabilize or grow its subscriber base while also increasing free cash flow—a challenging endeavor considering the projected revenue trajectory in the short term. The expectation is that connected fitness subscriber counts will decrease by 4% in 2025 and further by 8% in 2026, leading to uncertainty regarding when the subscriber base will stabilize and allow for simultaneous revenue and profitability growth.
In light of these factors, Morgan Stanley has revised its price target on Peloton stock upwards to $3.50 from $2.50, while maintaining an equal-weight rating on the stock. In an update on leadership, Peloton has narrowed its list of candidates for the CEO position, although the timing of an official announcement remains uncertain.
Karen Boone, the interim co-CEO, confirmed this on the call, highlighting the recent departure of Barry McCarthy as CEO in May. Morgan Stanley remains optimistic, acknowledging multiple positive catalysts approaching the horizon, particularly with the anticipated arrival of a new CEO. Such leadership may unveil an updated growth strategy alongside more conservative revenue and subscriber guidance—elements that could position Peloton for a future of surpassing expectations in 2025..