New Price Target for Peloton After Surprising Profit

Fans and readers of the small caps/Stocks Under $10 series may recall that little more than a week ago, I covered Peloton Interactive PTON ahead of earnings. 

After going over Wall Street's expectations and my own technical levels, I finished with the following sentences: 

"I think I have to re-initiate the name ahead of earnings. We would then use the 200-day line as our new pivot but let's wait on that to see how the stock performs in heavy traffic today. I am not yet back in this name, but it has once again made itself interesting."

So, did you? Did you buy this beleaguered name ahead of its earnings release? 

As advertised, I am long the name as I write this piece. It's easy for me to stay on top of this name. I am no Peloton enthusiast, but I am a spin class enthusiast. I like to do in-person spin, and I do spin online. I use one of Peloton's competitors, but this stock is the only way my brain knows to track the popularity of spin as a form of exercise. From my point of view, especially since I blew out my knee last year (ending my running career), this is the most effective way to sweat like Niagara Falls and get some good cardio in.

The Quarter

On Thursday morning, Peloton Interactive released the firm's fiscal fourth quarter financial results. For the three-month period ended June 30, Peloton posted a surprise GAAP EPS of $0.05 versus expectations for -$0.05. This came on revenue of $606.9 million. That sales print may have reflected a year-over-year contraction of 5.7%, it also beat Wall Street's consensus view by about $27 million.

Oh, and this result wasn't just some kind of accounting-based magic. The firm produced positive operating income and positive net income for the quarter, as well as positive operating cash flow and positive free cash flow for the fiscal year. How 'bout them apples?

The firm still faces a tough reality. Ending Paid Connected Fitness subscriptions were down 6% to 2.8 million with average churn running at 1.8%. Ending paid app subscriptions were down 11% to 552,000 with average churn running at 6.4%.

Operations

As revenue generation contracted 5.7% to $606.9 million. The total cost of revenue contracted 15.9% to $278.8 million. That left a gross profit of $328.1 million (+5.2%). That's what I call fiscal discipline. Operating expenses dropped 20.5% to $298.5 million, leaving operating income of $29.6 million, up from -$63.3 million for the year-ago comparison.

After accounting for interest, other income and expenses and taxes, the firm posted GAAP net income for the quarter of $21.6 million, up from -$30.5 million for the year-ago period. This works out to $0.05 per fully diluted share, up from last year's -$0.08.

Guidance

For the current quarter (fiscal Q1, 2026), Peloton is projecting revenue of $525 million to $545 million, which would amount to a year-over-year contraction of 9% to 12%. This is a little lighter than the $555 million that Wall Street was looking for. The firm does see a gross margin of 52%, which would be an improvement of 20 basis points.

For the full year coming, the firm sees revenue of $2.4 billion to $2.5 billion, which at the midpoint would be a year over year contraction of 2%. Gross margin is seen at 51%, while adjusted EBITDA is seen at $400 million to $450 million. At the midpoint, that would be good for a year-over-year increase of 5%.

Fundamentals

Very impressively, for the quarter reported, Peloton generated operating cash flow of $117.1 million (+258%). Out of that number came capex spending of $4.7 million, leaving free cash flow of $112.4 million (+332%). For the full year, operating cash flow printed at $333 million, up from -$66.1 million for the year prior, while free cash flow landed at $323.7 million, up from -$85.8 million.

Turning to the balance sheet, Peloton ended the period reported with a cash position of $1.04 billion and inventories of $205.6 million. This puts current assets at $1.438 billion. Current liabilities add up to $803.9 million including $208.7 million in shorter debt, but also $150.7 million in deferred revenue (which is not a true financial obligation). That puts the firm's headline current and quick ratios at a healthy enough 1.79 and 1.53. Once adjusted for those deferred revenues, those two ratios rise to 2.20 and 1.89, respectively.

Total assets amount to $2.125 billion including just $46.8 million in goodwill and other intangibles, which is close to nothing, really. Total liabilities less equity comes to $2.539 billion. This is where the firm's balance sheet gets ugly. On the books, the firm has long-term net loans of $946.9 million and convertible senior notes of $343.6 million. That's a lot of wood to cut and its wood that could ultimately dilute the equity. That said, the current situation is strong, and the firm can at this time, meet its short to medium-term obligations.

Thoughts​

Readers will see that the shares are breaking out of a double-bottom pattern of reversal with a $7 pivot. In doing so, PTON has enjoyed a bullish crossover of its 50-day SMA by its 21-day EMA. ​This is sometimes referred to as a swing traders' or "baby" golden cross. The real pivot is now the 200-day SMA, which is something the shares are wrestling with right now. That line currently stands at $7.44.

Note that while relative strength is improving nicely and the daily MACD has suddenly taken on a bullish posture that the stock is still having trouble taking and holding the 50% retracement (or halfway back point) of the December into early April sell-off. There is likely algorithmic resistance at that level.

Peloton Interactive (PTON)

Target Price: $9.00

Pivot: 200-day SMA (currently $7.44)

Add: Down to 50-day SMA (currently $6.75)

Panic: Loss of 50-day SMA

At the time of publication, Guilfoyle was long PTON equity.