BODY - Beachbody: Near-Distressed Valuation But It's Not A Buy

2023-04-27 13:22:54 ET

Summary

• Beachbody's decline over the last year has placed its multiple against forward sales at near-distressed levels.
• The company saw revenue decline by nearly a third during its fiscal 2022 fourth quarter.
• Whilst gross margins moved up by 1200 basis points, this was due to the collapse of lower-margin Connected Fitness sales.

Beachbody ( BODY ) might be oversold. The stock is down 74% over the last year to trade at a 0.26x forward price-to-sales multiple, around 68.4% lower than its peer group median. To state this is low would be an understatement, this is a near-distressed pricing for a company that whilst still unprofitable as of its fiscal 2022 fourth quarter, held cash and equivalents of $84.6 million as of the end of its fiscal 2022 fourth quarter. This is roughly 57% of its market cap and came against an operational cash burn of $10.2 million during the quarter.

What are you buying at the now $149.46 million market cap? A somewhat holistic health company with businesses ranging from fitness-related streaming to supplements and nutrition programs. The bullish argument is built around the company's growing subscriptions and the general health and wellness trend. Pandemic-era stay-at-home orders provided a boom for sales with people locked indoors and gyms shut. However, sales have since struggled for growth with revenue for the fourth quarter at a 31.5% decline from the year-ago period.

Flagging Revenue As Cash Burn Comes In Hot

Beachbody's fiscal 2022 fourth-quarter revenue came in at $148.2 million , a marked decline from the year-ago comp but still a beat by $1.9 million on consensus estimates. The company's three operating segments all experienced broad revenue declines. Digital saw revenue decrease by 16% to $68.7 million on the back of a 23% fall in subscriptions to two million. Revenue for Connected Fitness collapsed 87% to $4.8 million with roughly 3,700 bikes delivered during the quarter as Nutrition and Other revenue decreased by 23% to $74.7 million. This came on the back of nutritional subscriptions decreasing by 27% to 220,000.

Critically, it's this sustained decline in revenue that has been weighing down on Beachbody's common shares. There is seemingly no light at the end of the tunnel with management also not providing enough concrete detail during their earnings call on the underlying causes of flagging growth and how they plan to address it. Further, gross profit during the fourth quarter came in at $84.62 million a decline from $97.6 million in the year-ago period. This came as gross profit margins expanded by 1200 basis points to 57% from 45% in the year-ago comp. The material increase was due to the collapse of lower margin Connected Fitness revenue. Digital gross margin actually declined to 77% during the quarter from 84% in the year-ago comp and Nutrition's gross margins were broadly flat versus its year-ago figure.

I'm not quite sure what the bullish argument is here beyond the near-distressed sales multiple which can be broadly justified with what's been revenue in decline for two years. The company remains unprofitable with a net loss of $45 million during the fourth quarter. Bulls would be right to highlight that this was a marked improvement from a loss of $146 million in the year-ago period as total operating expenses fell to $132.8 million from $261.4 million. However, cash from operations, perhaps the most important profitability metric, remained negative at $10.2 million. This was a deterioration from a loss of $3.7 million in the prior quarter but a huge improvement from a loss of $76 million in the year-ago comp.

Encouraging Health Esteem

Bears, who form the 10% short interest in the company, are of course on the front foot as the company moves solidly below the NYSE's minimum listing requirement. A reverse stock split is likely sometime this year with the company's cash position providing enough of a runway for at least two years of operations against their current pace of cash burn. Beachbody has stated that it's in pursuit of a $231 billion total addressable market. However, the lack of revenue traction likely reflects the overall poor positioning and offering of the company's products. The market is just too saturated.

YouTube provides a crude but free resource for at-home fitness workouts and easy-to-follow nutrition plans can be found on the front page of Google. The company's pandemic-era growth is firmly in the rear-view mirror and the likely outlook through 2023 and beyond is the managed pullback of its finances that has followed the company's broadly unsuccessful fight with brick-and-mortar commercial gyms. That the company is down over 95% from its $10 SPAC reference price, is facing being moved to the OTC, and has been unable to expand revenue for two years is a poor reflection on the business and its overall investability. The current rising rate environment is entirely allergic to the current loss-making and revenue in decline iteration of Beachbody. The distressed multiple against this does not present a clear signal to purchase common shares.

For further details see: