Peloton's Q2 Earnings: A Glimpse of a Sustainable Turnaround?

Peloton Interactive (NASDAQ: PTON) has long been a cautionary tale in the tech world—a company that soared on the back of a fitness revolution but stumbled under the weight of unsustainable growth. But its Q2 2025 earnings report, released on February 6, 2025, may finally signal a turning point. With revenue of $674 million, a 9.4% year-over-year decline but a $14 million beat on guidance, and a 12.9% gross margin in its hardware segment for the first time in over three years, Peloton is showing signs of a hard-earned reset. Let's break down what this means for investors and whether the stock deserves a re-rating in today's market.

Revenue and EBITDA: A Tale of Two Metrics

Peloton's Q2 revenue of $674 million was a mixed bag. While the 9.4% year-over-year drop in Connected Fitness Products revenue (down to $253 million) reflects ongoing struggles with hardware sales, the subscription business held up remarkably well. Subscription revenue of $421 million, down just 1% YoY, accounted for 62% of total revenue—a shift that underscores Peloton's pivot to a recurring revenue model.

The real story, however, is in the bottom line. Adjusted EBITDA surged to $58 million, a 171% improvement from a $81.7 million loss in Q2 2024. This wasn't just a one-time win; it was a structural shift. Peloton slashed operating expenses by 25% YoY, with sales and marketing costs down 34%, general and administrative expenses down 18%, and R&D down 25%. The result? A free cash flow of $106 million, a 385% increase from the previous year.

Margin Stability and Unit Economics: The New Foundation

Peloton's gross margin expansion is a critical development. The Connected Fitness Products segment's 12.9% margin, driven by a shift toward higher-margin products like the Tread and Tread+, marks a return to profitability in hardware. Meanwhile, the 67.9% subscription gross margin (up 60 basis points YoY) highlights the durability of its recurring revenue model.

But margins alone aren't enough. Peloton's unit economics are finally showing promise. The average net monthly churn rate of 1.4%—a 50-basis-point improvement from Q1—suggests that the company is retaining users more effectively. This is no small feat for a subscription service that once faced a 20% churn rate. The key? Diversified engagement. Members who participate in two or more workout disciplines (e.g., cycling, strength, yoga) have a 60% lower churn rate than those who stick to a single discipline. Peloton's recent launches, like the Strength+ app and Peloton Teams, are designed to deepen this engagement.

User Engagement: The X Factor

Peloton's ability to re-engage its user base is a make-or-break factor for its long-term value. The company's Net Promoter Scores (NPS) for its Bike and Tread products now exceed 70—a rarefied level in consumer tech. Member satisfaction scores have climbed to 4.3 out of 5, and initiatives like the “Find Your Power” campaign with the Watt brothers have driven a 280-basis-point increase in male subscription additions.

But the real test is whether these improvements translate into growth. Peloton ended Q2 with 2.88 million paid subscriptions, a net decrease of 21,000. While the churn rate is improving, the company still faces a headwind of 200,000 lapsed subscribers. The good news? Marketing efforts to re-engage these users are working. Peloton's LTV-to-CAC ratio has improved, and the “Find Your Power” campaign alone added 50,000 new users during the Turkey Burn event.

Valuation and Re-Rating Potential

Peloton's current valuation metrics tell a story of cautious optimism. At a forward P/E of 21.41 and an EV/EBITDA of 66.47, the stock is trading at a premium to its historical averages but in line with peers in the consumer discretionary sector. Analysts have upgraded their price targets, with UBS raising its target to $11 and Truist to $11, while Goldman Sachs trimmed its target to $7. The average price target of $9.21 implies a 31% upside from the current price of $7.00.

The question is whether this re-rating is justified. Peloton's raised guidance for FY2025—$2.43–2.48 billion in revenue and $300–350 million in adjusted EBITDA—suggests confidence in its cost discipline and margin expansion. But the market is skeptical. The stock's 10.75% pre-market jump after the earnings report was short-lived, and the EV/EBITDA of 66.47 remains high for a company that still hasn't turned a profit.

Historically, Peloton's stock has shown a positive bias in the short term following earnings releases. From 2022 to the present, a simple buy-and-hold strategy yielded a 50.00% win rate over 3 days, 64.29% over 10 days, and 57.14% over 30 days post-earnings. The maximum observed return was 3.35% over 4 days, suggesting that while volatility remains, the stock has historically trended upward in the immediate aftermath of earnings announcements. This pattern implies that Peloton's post-earnings performance could reflect a mix of optimism and skepticism, with the market rewarding short-term execution but demanding long-term proof.

The road ahead for Peloton hinges on whether these historical tendencies align with its current trajectory. If the company can sustain its margin improvements and subscriber retention gains, the market may begin to price in a more durable recovery. However, the high EV/EBITDA multiple and lack of consistent revenue growth remain hurdles.

The Road Ahead: Profitability Before Growth

Peloton's leadership, under CEO Peter Stern, has made it clear: the focus is on profitability before growth. The company's deleveraging of its balance sheet (net debt down 30% YoY) and $829 million in unrestricted cash provide a buffer for strategic investments. But investors should be wary of over-optimism. Peloton's Q3 guidance of $605–625 million in revenue, below the $652 million analyst estimate, reflects a cautious approach.

For Peloton to justify a re-rating, it must prove that its cost discipline and margin improvements are sustainable. The key metrics to watch are:
1. Subscriber retention: Can Peloton maintain a 1.4% churn rate while expanding its user base?
2. Product innovation: Will features like Strength+ and Peloton Teams drive engagement and justify potential price hikes?
3. Deleveraging: Can the company reduce its net debt further without compromising growth initiatives?

Investment Takeaway

Peloton's Q2 earnings are a green light, not a red carpet. The company has taken the right steps to stabilize its finances and improve unit economics, but the road to profitability is still long. For risk-tolerant investors, the current valuation offers a speculative opportunity, especially if Peloton can execute on its guidance. However, the stock remains a high-beta play—sensitive to macroeconomic shifts and competitive pressures.

If Peloton can maintain its EBITDA momentum and continue to deleverage, the $9.21 average price target could be a floor, not a ceiling. But until the company demonstrates consistent growth in both revenue and profits, a cautious approach is warranted. For now, this is a stock to watch, not a buy for the faint of heart.