Why Peloton Stock Soared Over 50% This Week

Shares of Peloton Interactive (NASDAQ: PTON) soared over 50% this week, according to data from S&P Global Market Intelligence . The at-home fitness company stabilized its revenue growth and improved cash flow, but is still losing subscribers each quarter.

After the pandemic, Peloton's business collapsed, leading the stock to fall more than 98%. Even after this week's pop, the stock is still off 97% from all-time highs, meaning anyone who invested $100 at the top only has $3 today.

Here's why Peloton Interactive stock rocketed higher this week.

Stabilized revenue, improving profit margins

In Peloton's fourth quarter ending in June, total members declined to 6.4 million. This is compared to 6.6 million a quarter ago and 6.5 million in the same quarter a year prior. While this is obviously not a good thing, Peloton is rationalizing its business and is seeing some solid financial improvement compared to a few years back.

Revenue was flat year over year in the quarter at $644 million, meaning Peloton is able to gain more revenue from its core customers. Gross margins have improved a ton, leading to 55% gross profit growth in the quarter.

Importantly, net income and free cash flow made a big improvement as well. Net loss was only $30 million compared to $240 million a year ago. Free cash flow was actually positive $26 million. All these are major financial improvements compared to 2022, when investors worried that Peloton may go out of business.

Another thing that may have boosted Peloton's stock gains this week was the high short interest the stock has. Indeed, 20% of its shares are estimated to be sold short , meaning loaned out to short sellers. When a stock starts rising, short sellers may buy back these loaned-out shares to cover their shorts, which can create a short squeeze. It is possible a short squeeze occurred this week.

Is the stock a buy?

Peloton stock is up and now has a market cap of $1.8 billion. Generating $2.7 billion in revenue and marching back toward positive profitability, one could make the argument Peloton is a buy at these depressed prices.

I still think investors should avoid the stock, though. Total members -- i.e., users of Peloton -- have fallen for years. Back in the third quarter of fiscal year 2022, it had 7 million total members. Now, that has fallen closer to 6 million, with management not proving it can stem the bleeding.

Unless you think a turnaround in active users is imminent, you should avoid buying Peloton stock right now.

Before you buy stock in Peloton Interactive, consider this: