Peloton (PTON) CEO Barry McCarthy hyped up the company in a fresh shareholder letter that helped to fuel a 20% short-covering rally in Peloton's stock on Wednesday.
"If you’ve been wondering whether or not Peloton can make an epic comeback, this quarter's results show the changes we’re making are working," McCarthy said.
One could appreciate the enthusiasm of the veteran tech exec, who has helmed Peloton for a year, in reporting a better-than-expected quarter for the struggling fitness equipment maker.
The company made clear progress in containing its bloated cost structure and preserving dwindling cash flow, in large part because of the headcount axe McCarthy swung at the company in 2022.
Still, the "epic comeback" bluster from McCarthy may be misguided.
Wall Street continues to have reservations about the long-term path forward for Peloton, especially as the latest quarterly results were far from fundamentally amazing. If anything, they just weren't that horrible, which may not be a good enough reason for investors to back up the truck on the stock.
"My view is that it may not be an epic comeback," EvercoreISI analyst Shweta Khajuria said on Yahoo Finance Live (video above), adding: "It may be a respectable comeback."
Here are three red flags that stood out to Yahoo Finance in its analysis of Peloton's fiscal second quarter, which warrants a rethink by the bulls.
The lifeblood of any business is cash flow, and Peloton continues to struggle mightily to keep cash inside its business despite having a large base of recurring subscriber revenue and a leaner expense structure.
Peloton's free cash flow saw an outflow of $94 million in the second fiscal quarter. In the past twelve months, free cash flow declined by $747 million.
"We won’t have the wind at our back every quarter, but we continue to do what’s necessary to ensure this trend continues," McCarthy said in his letter. "As a result, we once again control our own destiny. Our goal remains the same, reach free cash-flow breakeven by year-end FY23."
Peloton's important subscription sales declined by about $1 million sequentially even as the number of members stayed consistent at around 6.7 million.
This dynamic "shows potentially eroding quality of sales/subs and continuing to raise the question as to whether Peloton has eclipsed its core-and-committed potential user base," BMO Capital Markets analyst Simeon Siegel wrote in a client note.
The sluggish sales trajectory underscored Peloton's difficulty in expanding its market, a factor that has analysts worried longer term.
"The market is not as big enough as we thought in terms of the ability to penetrate every single household," Khajuria added.
Peloton's cost-cutting ways haven't led to profitability on an operating basis.
This reflects the company's still-bloated cost structure and pricing pressure on its products (which could be seen in its buzzy holiday deals).
Peloton's quarterly adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] clocked in at a loss of $122.4 million. Fiscal year to date, Peloton's adjusted operating loss has tallied $155.8 million.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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Simeon Siegel, BMO Managing Director, discusses Peloton's business and reports of its possible sale to another company. You can see the full interview here. Key video highlights 00:34 On companies that shouldn't buy Peloton 01:06 On Apple's position to buy 01:33 On Peloton's brand
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