|Shares Out. (in M):||46||P/E||0||0|
|Market Cap (in $M):||1,290||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
|Borrow Cost:||General Collateral|
After 2 years of patiently watching and waiting, I think it is time to short MB.
Mindbody is a leading provider of cloud-based business management software for the health and wellness services industry. The company was founded in 2001 to help yogis manage their studios. It has expanded into spas, salons, fine arts and any other businesses that need scheduling and payments processing capabilities. Mindbody currently has over 60k customers and is the largest provider (by far) in the health and wellness industry. The Company went public on June 19th, 2015 at $14 per share.
The Bull Story
Mindbody has a dominant industry position and large addressable market. The sell-side pegs MB’s total addressable market at $8-15+billion and with 2017e sales of $180mm, Mindbody is just getting started. The Company’s roadshow materials estimated that MB was just 28% penetrated in its core yoga/pilates vertical and that all other verticals were less than 5%, with most at just 1% penetration. In addition, Mindbody’s growing ecosystem has healthy network effects and their core SaaS solution is sticky since customers are unsophisticated and switching vendors is a pain point. As a result, MB is an attractive thematic investment in 1) SaaS and 2) growing demand for health and wellness services. While EBITDA margins are currently negative, long-term margins are estimated to be 30%. This is up from the 20% estimated during the IPO roadshow as management increased long-term guidance after 1Q15 results. Eight sell-side analysts rate the stock a buy and only two analysts rate the stock a hold.
The Bear Thesis
The short thesis on MB is simple. Mindbody has saturated its core health and wellness market and the company is a low quality SaaS business with poor customer lifetime value economics. As a result of the customer economics, the profits that bulls expect are unlikely to materialize.
This short thesis is not new. Friendly Bear attacked Mindbody on SeekingAlpha in October ‘16 and just two weeks later another author, Ariana Research, highlighted that the bull thesis is built on wrong and misleading lifetime value assumptions. I will summarize the key short arguments of both write-ups, below.
MB is a questionable JOBS Act IPO where management is intentionally hiding key metrics like churn that are necessary for proper LTV analysis
MB is 60% penetrated in their core fitness market which is by its nature is a high churn, high touch and is an “awful” industry to service
MB has 15 years of losses and should be profitable today if the customer economics are as claimed
At a $700+mm EV the valuation is extremely stretched (stock was ~$19/share)
MB has increased pricing as far as they can and subscriber growth is hitting a wall
MB is a leader in their saturated yoga/pilates vertical, but is not a leader in other verticals like spa/salon making future growth more costly and challenging
MB is not a highly productive and scalable SaaS business – their revenue per employee ranks at the bottom vs other local oriented business – and the company is seeing diminishing returns on its spending
“either the company gives up on the revenue growth dream and sees its multiple correct, or it fails to ever reach profitability and has to keep coming back to the markets for more cash”
MB does not have a >5x LTV/CAC ratio since the assumptions needed to get there – annual churn of 15-17% and CAC of $2k – are optimistic and are inconsistent with other data the Company provides (of note, current company presentation has increased this to a 6:1 LTV to CAC ratio)
Customer acquisition cost continues to skyrocket as MB stretches for growth outside of their core verticals