Whirly lollipop on orange background.

MINDBODY (NASDAQ: MB) completed their IPO last week at $14, had a brief pop at the open to $15 and promptly traded down to $12.Screenshot 2015-06-21 06.57.36

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 bafflingly 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 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.

Screenshot 2015-06-21 06.56.24

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.

Screenshot 2015-06-21 06.49.24

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.

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4 Comments

  1. wm posey on 06/21/2015 at 3:05 pm

    yo cndm – fabulous diggings on the mb mystery…….reminisent also of the cslt mess along w crcm as you say. very funny also about
    the “office repain” end of the business being the growth business.

    great work……oh also…..i have asked if your candy portfolio is available for viewing by subscribers, but received no answer. what’s the word there? – – best, wpo

    • Candyman on 06/29/2015 at 5:19 am

      We are working on an update and way to keep tabs on the IPO Candy Folio. Also expecting to add to that with a “broken IPO” portfolio and maybe a “New Tech Leaders” one.

  2. Nirvana on 06/22/2015 at 8:51 am

    Did you do a similar valuation for Shoppify $SHOP? This article seems too personal for some reason. SHOP , which went public with IPO last month is already up over 100%. IT’s trading at Price to sales of over 24. MindBody, on the other hand after this 17% drop is trading at 4.2 times sales. Revenue is still growing over 42%, which is huge. Revenue will only accelerate from now now, thanks to the new cash infusion. SG&A expenses will be flat from now. Marketing cost will be flat from now now. According to public research, the market for this Niche MindBosy is 100 times. I am not kidding, 100 times. They got 42,000 business customers now, and 24 mil consumers active online with their system. Thats huge. This is a niche market, focused on health and wellness. $FITBIT will be a huge collaboration for them. The potential market is over 4.2 mil small business health and welfare companies. More health consumers will become active members to look for the community in one place, that is MindBody Online. This is huge. This is like LinkedIn. This is like Uber. There can be competition, but they have the first mover advantage, and huge brand value already built in. If I were a health and fitness business, I would like to pay $150 bucks monthly fee to get huge consumer access huge community access. Why would I change to someone else if I am comfortable using a Software which I spend only $150 ??? The revenue is recurring. Sales and Marketing costs are one time and will flat. Multiply 4 mil times $100 + Payment processing fees. This is over $500 mil monthly recurring rev opportunity. Even if they get 20% of this market in the next 3 or 4 years, it is over $100 mil Revenue every month, and over $1 Bil Rev a Year company in few years. Health and Wellness is a hot business now, and all the insurance and corporations and Fitbits and Garmins all will collaborate to cut health cost and improve livelihood.

    I have no idea why you are bashing this on the first day after the IPO, that too after it is down 17%. I am sure this will bounce back hard on Monday. Nasdaq and the underwrites handled the IPO poorly. UBS, MorganStanly and CreditSuise are no small underwrites. They have option to buy to additional 1.1 mil shares. They will buy on Monday on open market. Look at Shoppify and see where and how they are trading. They have not made profit either. And Shoopify doesn’t even have active 24 mil consumers on their syste, Only business customers.

    • Candyman on 06/29/2015 at 5:26 am

      Thanks for the comments and yes I agree that MB has a big opportunity and they have a solid product and sizable market share. However the issues I have with the P&L remain. Management can certainly demonstrate through execution that they can bring these costs into line. It’s the high G&A that bothers me the most, I understand that growth companies often spend a big percentage of revenue on sales and marketing as an “investment.” This sometimes works out, but sometimes it doesn’t. (See ANGI, CRCM for evidence.)

      I apologize if the article comes across as “bashing” because I don’t have anything personal attached to the company. No position either. But a point of view is helpful in providing some value to the market discourse and our readers.

      One last point is that I found quite a few very good alternatives to MB products and services quite easily. Again similar to when I was researching CRCM. I found that many people used sites like sittercity and were very pleased. Also that care providers hated the payment system that CRCM was trying to impose on them. So it’s not clear to me how MB will end up in terms of positioning and success in the market. Time will tell!

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