Xponential Fitness’s stock price has taken a beating over the past six months, shedding 39.2% of its value and falling to $4.98 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Xponential Fitness, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Xponential Fitness Will Underperform?
Even with the cheaper entry price, we don’t have much confidence in Xponential Fitness. Here are three reasons why there are better opportunities than XPOF, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Xponential Fitness grew its sales at a 19.5% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Xponential Fitness’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Xponential Fitness’s $525.6 million of debt exceeds the $24.99 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $98.7 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Xponential Fitness could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Xponential Fitness can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Xponential Fitness doesn’t pass our quality test. Following the recent decline, the stock trades at 8.7× forward P/E (or $4.98 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
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