Peloton has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 38.7% and now trades at $7.17. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Peloton, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why we avoid PTON and a stock we'd rather own.

Why Do We Think Peloton Will Underperform?

Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.

1. Inability to Grow Connected Fitness Subscribers Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Peloton, our preferred volume metric is connected fitness subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Over the last two years, Peloton failed to grow its connected fitness subscribers, which came in at 2.88 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Peloton might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Operating Losses Sound the Alarms

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Peloton’s operating margin has been trending up over the last 12 months, but it still averaged negative 19.7% over the last two years. This is due to its large expense base and inefficient cost structure.

3. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

While Peloton posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Peloton’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.8%, meaning it lit $1.84 of cash on fire for every $100 in revenue.

Final Judgment

Peloton falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 10.1× forward EV-to-EBITDA (or $7.17 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Would Buy Instead of Peloton

The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.

Get started by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.