Stock Market Insights

The Beachbody Company Inc. (NYSE:BODY) is an emerging leader in fitness products and services. The company became publicly traded following a three-way SPAC merger in June, combining its streaming platform and nutrition subscription service with the “Myx Fitness” brand that offers digitally connected workout bikes. This is a category that has gained momentum during the pandemic with a surge of consumers seeking at-home fitness options driving demand for new tech-based products.

The company just reported its first quarterly report since the IPO highlighted by momentum in its digital services with a growing number of paid subscribers. While shares of BODY have been volatile in recent weeks, we believe the stock looks interesting at the current level with the selloff helping to reset valuation lower. The company is well-positioned to capture significant growth opportunities supporting a positive long-term outlook.

(Seeking Alpha)

BODY reported its Q2 results on August 12th with a net loss of -$12.4 million compared to -$10 million in the period last year. While the headline revenue of $223 million represented only a modest 2% increase year-over-year, the bigger story was the more positive trends in the digital segment as revenues reached $94 million, up 20% y/y and also 61% on a 2-year stacked basis versus 2019. An increase of 7.4% y/y in total operating expenses led to the larger loss this quarter.

(Source: Company IR)

The key to recognize is that the company is shifting away from a focus on its nutritional supplements subscription business which is dragging lower the firm-wide results. The Nutrition segment which still represents 57% of the total business, generated $128 million in revenues, down 8% compared to Q2 2020. To be clear, the company intends to at least stabilize the nutrition products going forward with brands like “Shakeology”, “BeachBar”, and the “Beachbody Performance” supplements but the real attraction of BODY is its expanding digital ecosystem and launch of connected bikes.

With the Digital segment, the company now counts on 2.7 million subscribers, up 13% year over year. The main engagement metric for the company in daily and monthly average users at 32% was nearly flat from the period last year and up 330 basis points compared to 2019. This is against what was difficult comps from Q2 2020 which represented an exceptional period in the industry with consumers staying at home during the pandemic lockdown stage. Beachbody notes a 95% retention rate across subscriptions, down 140 basis points lower compared to Q2 2020 and flat from 2019.

(Source: Beachbody)

For context, Beachbody includes a streaming platform for on-demand workout videos launched in 2016. This is an evolution from the company’s legacy “P90x” workout videos sold as DVDs and a staple of broadcast TV infomercials since the early 2000s. The company is expanding with a September launch of “BOD Interactive” featuring live content. The company also operates “Openfit” brand launched in 2019 that goes a step further including more comprehensive certified instructor-led training with personalized fitness planning.

The newest addition to the group since the IPO was the merger with “Myx Fitness” which includes a subscription service tied to specialized workout equipment like the “MYX II” stationary bike connected to a video screen with scheduled workout classes through a monthly subscription. It’s worth noting that given the timing of the merger transaction, BODY only included 5 days of sales related to the MYX from June 25th in the Q2 results. Management noted during the conference call that the pre-merger company sold around 10,000 bikes in the quarter, representing about $14.3 million in sales with an expectation for this trend to accelerate.

In essence, the MYX II and MYX II Plus are alternatives to the more widely familiar Peloton Interactive Inc. (PTON) bikes, competing with a more affordable price. The MYX screen can be used to display non-bike exercise videos adding to its usage flexibility with pricing at $1,399 compared to a $2,495 Peloton Bike+ with similar features.

(Source: Beachbody)

The growth strategy here is to continue launching new products while leveraging cross-selling opportunities between brands with a growing ecosystem of members. With a current balance sheet position of $347 million and no debt, Beachbody intends to use the IPO proceeds to fund a media marketing investment meant to drive brand awareness and support growth.

Management is guiding for full-year 2021 revenue between $930 million and $960 million. Within that figure, the expectation is to sell around 95,000 connected bikes, based on 2-quarters worth of sales post-merger, with an acceleration into the Q4 holiday shopping season. Adjusted EBITDA is expected to be negative between -$100 million and -$110 million. While published consensus estimates are not available for the company, the expectation is that 2022 top-line momentum is supported by a full year of connected bike sales with the Myx Fitness brand along with continued momentum in the broader digital segment.

It’s fair to say Beachbody’s Q2 result was mixed between the otherwise tepid headline 2% revenue growth and wider loss balanced by the positive digital trends. That said, we are particularly encouraged with the outlook for the MYX bike which opens up an entirely new growth driver going forward. By this measure, the underlying operating and financial trends are more positive than the latest headline numbers.

Management’s revenue guidance for this year at the midpoint target of $945 million implies about 5.5% growth over the preform $893 million 2020 results. Even still, extrapolating the second half of 2021 growth rates, Beachbody entering Q4 is on track to be generating an annualized revenue run rate growth of about double digits. Investors can look forward to the Q3 results incorporating the MYX bike sales along with continued momentum from the digital subscriptions.

In terms of valuation, considering the market cap of $1.9 billion, BODY is trading at around 2x forward sales. We mentioned Peloton, and for reference shares of PTON trade at a forward P/S of 8x, although the company likely deserves some premium given its larger size and position including current profitability. As it relates to BODY, we believe the current valuation is attractive with the forward outlook in a high-growth market segment with tech exposure and a solid balance sheet.

We like Beachbody and despite questions regarding the long-term earnings potential and sustainability of the demand and growth of connected bikes, we are willing to give management and the company a benefit of the doubt. We rate shares of BODY as a buy with a year ahead price target of $10.50 representing a 2.5x multiple on the 2021 management revenue guidance.

The upside for BODY is that it can at least capture some incremental market share from PTON in connected bikes by undercutting price while generating organic growth across its broader brand ecosystems. Longer term, greater certainty profitability can support a higher valuation. Depending on upcoming Q3 and Q4 results, the possibility that Beachbody outperforms with stronger than expected sales and firming margins can be a catalyst for the stock.

The risk here comes down to execution. Weaker sales momentum or failure of the MYX bike to gain consumer adoption would force a reassessment of the long-term outlook and pressure the stock. There is also some concern that as the pandemic ends, consumers could abandon at-home workouts, although this view is debatable. Monitoring points in the upcoming quarters include the engagement levels across the subscription business along with trends in financial margins.

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This article was written by

BOOX Research is now Dan Victor, CFA

15 years of professional experience in capital markets and investment management at major financial institutions.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in BODY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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