Motley Fool: Wait to see evidence that Peleton's AI pivot is bearing fruit

Investors should hold off on buying shares of small-cap fitness equipment maker Peloton, Motley Fool contributor John Ballard argues. The company first needs to demonstrate that the AI features it introduced in its equipment last autumn can expand its customer base and reignite revenue growth, he says.

Ballard advised investors to wait before buying Peloton shares until the company proves that AI features in its equipment can drive growth in both customers and revenue.

So far, the data suggests the opposite: in its latest quarterly report, for its fiscal-2026 second quarter, ended December 31, the company posted a 3% year over year decline in revenue to $657 million, while paid subscribers fell 6% to 5.9 million.

There are, however, positive developments, the most notable being improving profitability, Ballard notes. Gross margin rose by 3.2 percentage points to 50.5%, while adjusted EBITDA surged 39% to $81 million. This allowed the company to raise its full-year fiscal 2026 outlook, which ends on May 31, from $425-475 million to $450-500 million.

In autumn 2025, Peloton – which has spent several years trying to overcome a post-pandemic sales slump – unveiled a fully refreshed lineup of equipment featuring its Peloton IQ system, integrating AI and computer vision. The platform provides users with analytics, feedback, and personalized recommendations and, as Chief Product Officer Nick Caldwell said, will be a key element of the company’s strategy.

“This is the start of a new chapter for Peloton,” CEO Peter Stern said. “This is more than an upgrade; it's a relaunch.”

Markets reacted to the move with a selloff: on the day of the product launch, Peloton shares fell 10%. The reason was higher prices for both equipment and subscriptions, Bloomberg reported.

According to the latest quarterly report, the number of paid subscriptions declined 7% year over year to 2.66 million. Peloton had warned that price increases could lead to a more pronounced drop, the company said.

Year to date, Peloton shares have fallen more than 36%, closing at $3.93 per share on Monday.

The sharpest drop came on February 5, when the company released its quarterly results – shares fell nearly 26% to $4.39 per share. After that, at least two Wall Street analysts lowered their target price for the stock: Telsey Advisory Group cut its target by 25% to $6 per share, while Citigroup reduced its by nearly 40% to $5 per share, according to Yahoo Finance data.

Overall, the stock has 11 “hold” ratings, eight “buy,” and one “sell.” The average target price stands at $6.79 per share, implying upside of nearly 73%.