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Thesis

The fitness industry is extremely competitive. If done correctly, it can have alpha returns like Planet Fitness (PLNT) has. If it’s all hype & overvaluation it can lose 80% of its market cap in a single year. Peloton (PTON) is a perfect example of this type of scenario.

F45 Training Holdings (FXLV) is another fitness stock which went public last year. The company has significant growth & is opening up new locations at rapid rates. In fact, CEO Adam Gilchrist claims F45 is the “fastest growing franchise of all time.

F45

F45training.com

With its current valuation, F45 could be a solid long term investment at current prices. Mark Wahlberg sits on the company’s board of directors, so publicity & customer acquisition should fall in the company’s favor. However, there are 2 caveats with this business that investors to consider which I will discuss below.

The Company

F45 is a fitness center franchisor. However it is very different from typical gyms such as Planet Fitness. Planet Fitness is what one expects from a gym: weights, machines, refrigerator with gatorade etc. F45 is a completely new concept. This gym’s style of exercise consists group workouts that are very interactive. As of this writing, the company has over 3300 total franchises & is present in 65 countries. Below is a table detailing the company’s growth by source of revenue.

Quarter New Franchises Opened New Gyms Opened Same Store Sales Growth Franchise Revenue Growth Equipment Revenue Growth

Q2 2021

554 68 126% 71% 16%
Q3 2021 210 63 6% 32% 10%
Q4 2021 290 131 6% 68% 667%

The differences in this business model from typical gyms such as Planet Fitness are significant. Planet Fitness up-sells personal training sessions to offer one on one attention to its subscribers for its franchisees. In F45’s case, the one on one aspect of the gym is the entire business model.

At a glance, this may seem to be an advantage through differentiation. However I see it as the opposite in two ways. First, F45 must be full of enough personal trainers at all hours to satisfy the business model. A certified personal trainer is a highly specialized craft whose credentials require money, time & effort to acquire. Since the personal trainers at Planet Fitness are a bonus to gym members, they are a requirement to run the operation.

The second disadvantage is the pool of customers. For Planet Fitness, anyone who can afford $10 a month is a potential customer. This can be a great business model when up to 67% of gym members don’t even show to up use the equipment. For F45, only those who can afford $200 a month are potential customers. Chances are customers who stop showing up will cancel their membership at that price.

Financials

Now that the pandemic is nearing its end, the fitness industry has the opportunity to rebound back. F45 is taking full advantage of this opening where it can. The company is still struggling in Australia as lockdowns still persist in that location.

After the IPO last July, F45 paid off 86% of its total liabilities as you can see here. Income has been somewhat inconsistent. The most recent quarter incurred a net income of $14.8M. Prior to this quarter, the company had 4 consecutive quarters of losses which total $230M.

From what I can gather, the company has 3 sources of revenue. One time $50k establishment fee which is amortized over 10 years. The second source is equipment revenue of $125k per new franchise, which is recognized all at once upon delivery. Other equipment revenue can be recorded but this is only for replacement of existing equipment or wear & tear. The third is the $2500 or 7% of monthly franchise revenue whichever is larger. The franchise revenue is the only of the three that will be recurring & consistent over time.

Once the market for potential franchisees is saturated, 2/3 source of revenue will be lost. The fact that 32% of all revenue for the company will one day stop or significantly slow down is the major caveat investors should consider.

Because of this, I believe using only recurring revenue for F45’s valuation is a fair way to measure. Annualizing the Q4 $21.5M of franchise revenue puts the company at $86M. This values F45 at 14.7 P/S multiple. For a company growing this quickly, I feel that is a reasonable valuation.

For TAM, I will annualize the most recent quarter’s franchise revenue of $21M to $84M. F45 currently has 3300 total franchises currently, the goal of 23k total franchises is roughly 7x the number of franchises today. This puts the maximum recurring revenue for F45 at roughly $588M. This does not include any increases in franchise fees or franchise fees that go above the 7.5% per gym previously mentioned.

The climb to $588M is not an easy task by any means. Planet Fitness’ total revenue for 2021 was $534M. It should be noted that it took almost 30 years from the company’s founding to achieve that result. But the growth of F45 cannot be ignored.

Comparison

Planet Fitness vs F45 (SeekingAlpha)

Conclusion

Maximum revenue could take some time for F45. For those that are patient & willing to invest in a new fitness concept, F45 is an interesting prospect. I believe the company is fairly valued at its current price. I rate the stock as a hold until the company can consistently profit & address the major caveats in its business.

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