What’s Ailing Mindbody?

Mindbody Inc. (MB) completed their IPO last week at $14, had a brief pop at the open to $15, and promptly traded down to $12.

 

What gives? Isn't this the "OpenTable (PCLN) of the health and fitness industry" as management states? Well maybe it is, maybe it isn't. One thing for sure is that a few things jump out from the financials and the history of the company to cast some doubt on their ability to fully execute on the glamorous positioning.

Here are the main reasons we would avoid this stock (except as a short) for now:

1. Expenses, particularly G&A, are high for a company at this stage of development. It's normal to see S&M expense ratios of 40-50% at emerging growth companies but G&A is at 29%! Holy backbend batman! It's difficult to get the ratio down to their target of 8-10% even if we stretch the IV model out to 2021. This is not a good situation.
2. Competition may be fragmented but it is intense and often more technologically advanced and cost effective. One such example is Genbook which is very effective and has a loyal following. There are many competitors, however and they underscore the fact that it's actually not very hard to build this application.
3. Management remains a question mark. The CEO/Founder has a BS in political science and Russian and the COO owned and operated yoga studios in NYC. This doesn't mean that they are not doing a good job building and running the company but neither does it instill confidence in the ability of Mindbody to be dramatically more efficient than they are today.

Business Model & Valuation

Our IV model doesn't suggest any upside for the shares from these levels based on the current trajectory of the company. As shown below the IV only gets to about $6/share out in 2017. That's a big gap between the IPO price of $14 and the current $12/share. In terms of the "sniff test" one notes that MB is trading at 6x trailing sales which is fairly expensive. We're reminded of Care.com (CRCM) which had a very successful IPO only to go on and disappoint investors with slow growth and continuing losses. CRCM reached a staggering $28/share post-IPO, and has been trading at single digits (now $6/share) for about a year.

 

There are two ways this analysis could be wrong: 1) if revenue growth accelerates dramatically and 2) if gross margins expand dramatically. We did run #2 through the IV model all the way up to 80% gross margin which gets to an IV of $14/share in 2017. That's very little return over a two year period in exchange for 50% capital risk. Not a bet we would be willing to make.

 

On a final note we can't hold a candle to those SEC filing sleuths at footnoted but buried in the S-1 is a puzzling and possibly scandalous line item regarding considerable expenses for "office repair, maintenance, building fixtures and other professional services" paid to related parties over the past three years of $130K, $216K and $554K in 2015. This appears to be a great growth business for someone but the person or parties are not named explicitly. We don't know who's getting the money but when combined with their extra ordinary G&A expense levels it casts another dim shadow on execution and shareholder focus.