Xponential Fitness (XPOF 1.72%) slips under the radar of many investors, but is slowly becoming one of the best growth stocks in the market. In fact, the stock’s growth has been so impressive that it’s one of the few growth stocks in the green over the past year, posting an exceptional 20% gain over the past 12 months. The S&P500 and Nasdaq Compound are down 18% and 29%, respectively, over the same period.
Here’s why it looks like Xponential Fitness shares could have plenty of room to keep rising over the long term.
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What is Xponential Fitness?
Xponential Fitness is a fast-growing franchisor of a portfolio of fitness studios, including brands such as Club Pilates, Pure Barre, Cycle House, Rumble, and more. Its franchises focus on specific fitness disciplines, ranging from pilates and yoga to boxing.
Xponential Fitness is the world’s largest franchisor of boutique fitness brands. Its total footprint of 2,100 US studios is nearly double that of its next competitor, Orange Theory, which had 1,191 locations as of September.
Skyrocketing revenue growth
In its most recent quarter (ended June 30), Xponential Fitness won over investors by growing revenue 66% year-over-year to $59.6 million — and at a time when some observers are skeptical. expected lower incomes due to higher inflation and lower consumer purchasing power. .
Xponential Fitness is targeting $70 million in adjusted EBITDA for fiscal 2022, which would be nearly triple the $27 million it posted in fiscal 2021 and seven times more than the $10 million which he won in 2020, although it should be noted that the 2020 results are likely artificially low because COVID caused many gyms and fitness studios to close.
The company is growing its revenue at an impressive rate, growing from $59 million in 2018 to the $216 million it is targeting in 2022, which would equate to a compound annual growth rate (CAGR) of 29.3%.
Recurring and resilient revenue
Xponential Fitness is a franchisor, and it’s growing its profits and revenue at this breakneck pace by acquiring brands, recruiting new franchisees, and opening new locations. It grew to 10 brands in just a few years and nearly tripled its total number of locations, from 818 in 2017 to 2,357 by the end of Q2 2022.
The footprint is expected to continue to grow, as the company says its franchisees are contractually obligated to open an additional 1,881 new locations in North America. Xponential says it offers an attractive value proposition for franchisees with operating margins of 25% to 30%, a payback period of two and a half years and a return on investment of 40%.
The more franchises that open, the more royalties the business can earn, and as a light franchisor, a large portion of those royalties will go directly to its free cash flow. This franchise-based model is particularly attractive because it provides the business with predictable and recurring revenue streams. The franchise model is also advantageous in times of rising inflation, because royalties are based on franchisee revenues, not profits, which could decline as costs rise.
I also like that Xponential Fitness is thinking outside the box with the extra effort to expand their B2B (business to business) offerings in creative ways. For example, Xponential partners with Lululemon Athleticait is Mirror Business will offer home workouts from four of its brands on the Mirror platform.
The company is also a partner of Celsius Fund, one of the fastest growing energy drink brands, and will offer its drinks in CycleBar stores. In addition, Princess Cruises will offer various Xponential brands on board its fleet of 15 ships through an exclusive partnership.
Xponential Fitness is a buy
All told, it looks like a compelling growth stock with plenty of trail. There are definitely risks here. Another round of lockdowns or shutdowns could bring the in-person fitness industry to a halt again, as it did in 2020.
Also, if the stock isn’t expensive, it isn’t cheap either. It has a multiple of approximately 15x enterprise value/EBITDA based on the $68-72 million EBITDA the company is targeting for 2022, which could drop if the broader market continues to weaken. struggle.
Perhaps the biggest challenge facing the title is the fact that the fitness industry is notoriously fickle and has seen many fads come and go over the years. Look no further than the likes of Platoon and F45 Training for examples of fitness stocks that garnered a lot of hype as the latest trend, but ultimately suffered high-profile crashes, destroying much of shareholder capital.
However, the fact that Xponential Fitness has a large portfolio of different brands, and the fact that this portfolio is constantly changing, should help mitigate the risk that a particular brand or style of exercise will go out of style.
If Xponential Fitness can continue to grow revenue by opening more franchises and increase profitability by converting that revenue into free cash flow, the stock could be worth much more than it is today.