Peloton's Cost-Cutting Payoff: Can Profitability Outweigh Revenue Woes?

Peloton Interactive's (PTON) stock has been a rollercoaster over the past year, falling 20% year-to-date as investors grapple with the fitness tech firm's struggle to balance cost discipline with stagnant revenue growth. The company's latest earnings report, however, reveals a critical turning point: Peloton is finally winning the battle to cut expenses, but its revenue declines suggest a long road ahead. For investors, the question remains: Can profitability offset the risks of a shrinking top line?

Cost-Cutting: A Clear Win

Peloton's Q2 2025 results underscore its success in slashing costs, which has been the cornerstone of its turnaround strategy. Adjusted EBITDA surged to $58.4 million, more than doubling analyst expectations and marking a $140 million improvement year-over-year. This milestone was driven by steep cuts across all major expense categories:
- Sales and Marketing: Down 34% to $153 million.
- General and Administrative (G&A): Reduced 18% to $131 million.
- Research and Development (R&D): Cut 25% to $60 million.

The result? Free cash flow hit $106 million in Q2, a $143 million year-over-year improvement, while net debt fell 30% to $660 million. These metrics are a stark contrast to Peloton's burn rate just two years ago, when bloated costs and overexpansion threatened its survival.

Revenue: The Persistent Weakness

Yet Peloton's revenue decline remains a thorn in its side. Total revenue fell 9% year-over-year to $674 million, slightly above estimates but still a red flag. The company's connected fitness hardware business—its historical backbone—dropped 21%, as demand for expensive equipment like the Bike+ and Tread+ remains soft. Even as gross margins for these products improved to 12.9% (their first double-digit print in three years), the sheer volume decline underscores a broader issue: Peloton is losing its grip on the hardware market.

The subscription business, which now accounts for 62% of revenue, offers a silver lining. Peloton ended Q2 with 2.88 million paid subscribers, a modest net loss of 21,000—a significant improvement from prior quarters. Churn also dipped to 1.4%, a 50-basis-point drop from Q1. But risks linger: 40% of new subscriptions come from secondary markets (e.g., used Peloton equipment), which have historically higher churn rates.

The Turnaround Dilemma: Profitability vs. Growth

Peloton's leadership, now under CEO Peter Stern (hired in 2024 from Apple Fitness+), has made a clear pivot: prioritize profitability over growth. This shift has paid off in the near term, but it raises a critical question: Can Peloton sustain its margin gains without reigniting revenue?

On one hand, the company's focus on cost efficiency is prudent. Its Q3 guidance projects adjusted EBITDA of $70–85 million, well above estimates, even as revenue is expected to dip further to $605–625 million. Peloton's deleveraging efforts have also reduced refinancing risks, with net debt down 30% year-over-year.

On the other hand, revenue trends are alarming. The hardware decline reflects both market saturation and competition from cheaper rivals like NordicTrack, while the subscription business's reliance on secondary markets hints at a lack of organic growth. Peloton's new features—like its Teams social fitness program (with 70,000 groups created)—aim to boost engagement, but these efforts are still nascent.

Investment Considerations

Peloton's stock trades at $6.38, far below its 2020 IPO price of $52, and below the consensus $8.80 price target. For investors, the calculus hinges on two factors:
1. Margin Resilience: Can Peloton sustain its EBITDA improvements even if revenue stays flat? The company's Q2 results suggest yes, but further cost cuts may be limited.
2. Revenue Stability: Will Peloton's new initiatives—such as partnerships with Costco boosting Bike+ sales or software-driven subscriptions—stem the tide of declines?

The risks are clear. If hardware sales continue to slide and subscription growth falters, Peloton could face a valuation gap between its current trajectory and its high-multiple past. Meanwhile, the stock's 5% post-earnings drop signals investor skepticism about its revenue guidance.

Conclusion: A Fragile Turnaround

Peloton's Q2 results are a mixed bag: cost discipline has delivered a lifeline, but revenue struggles remind us that fitness tech is a crowded, competitive space. The stock's valuation now reflects this tension—$6.38 is cheap if Peloton can stabilize margins, but risky if its top line keeps shrinking.

For now, the hold rating seems appropriate. Investors should monitor two key metrics: subscription gross additions (to gauge engagement) and free cash flow (to confirm profitability durability). A rebound in hardware sales or a surge in primary subscriptions could shift the narrative. Until then, Peloton remains a story of progress—but not yet a comeback.