The Beachbody Company, Inc. (BODY) was a company founded before 2000 that was recently taken public via a SPAC and has taken a beating partly because of the general disfavor for SPACs by the market.
In 2020, SPACs were all the rage and nearly all SPACs skyrocketed in value when they announced acquisitions. These vehicles were viewed as a quicker and simpler mechanism to take a company public as opposed to going the traditional initial public offering route. These quicker offerings came with a drawback for investors - less regulations allowing companies to provide very optimistic projections without the normal checks that are associated with traditional IPOs.
As a result, nearly half of startups that went public via a SPAC with less than $10 million in annual revenue have failed, or are expected to fail, to meet their 2021 revenue or earnings targets that they provided to investors. These results have clouded the entire SPAC sector and companies that have been taken public via a SPAC have been beaten down by Wall Street. BODY has surely had its own missteps but I believe BODY has been pushed further down because of this general negative sentiment to all SPACs currently.
Company Overview
Beachbody has been on my radar since my cousin and I would do P90X videos before high school. Tony Horton was our introduction to fitness and started our lifelong passions for it. The company was founded more than 24 years ago and has evolved greatly since then.
Beachbody operates several business segments which are complementary: Beachbody, Openfit, Myx and its nutritional business.
Beachbody
Beachbody was the company's original business and consists of their programs, such as P90X, Insanity and 21 Day Fix that are available through a digital subscription offering.
Openfit
Openfit is a personalized nutrition programming and tracking app with live group classes. In September of 2020, Openfit acquired Ladder, a nutritional products company that was founded by LeBron James and Arnold Schwarzenegger.
Myx
Myx is BODY's newest business segment and consists of an interactive fitness platform that provides commercial grade stationary bikes and accessories and on-demand subscription-based instructor-led fitness classes. This segment is a direct competitor to Peloton Interactive (PTON).
In addition to these business segments, BODY sells a nutritional shake, called Shakeology, which accounted for roughly 30% of BODY's revenues in the last quarter.
Q3 2021 Report
In the latest quarterly report, BODY did not perform as well as analysts had expected and the stock sold off substantially. BODY reported revenue of $207.05M and GAAP EPS of -$0.13 per share. Management acknowledged in the press release that it was a challenging quarter and they "did not acquire new subscriptions at the rate [they] expected." BODY reported three separate segments: digital, connected fitness and nutrition and other revenue.
Digital Revenue
Digital revenue decreased 5% compared to 2020 and increased 38% compared to 2019. However, it added 1% to its digital subscribers with 2.64 million (a 55% increase compared to 2019). Additionally, digital retention on a month-over month basis was 95.6% (a 50-basis point increase).
Connected Fitness Revenue
Connected fitness revenue was $5.9 million in the quarter, compared to none in 2020 because that preceded the Myx Fitness acquisition. In the quarter 14,700 bikes were sold. However, it is important to note that because of BODY's accounting methods, it only recognizes revenue when the bikes are delivered and only 44% of those bikes were delivered. Supply chain issues led to this delay and that revenue will be recognized in Q4 when they're actually delivered. Additionally, the subscription revenue associated with those bikes will also start to trickle in each month.
Nutrition and Other Revenue
Nutrition and other revenue was the segment with the biggest decline, decreasing 29% compared to 2020 and 16% compared to 2019. One reason for this decline is that BODY relies on trainers that act as independent contractors and sell supplements through events. Because of COVID's impacts, these events have been canceled and this segment has taken a hit as a result.
Most investors and analysts believe that BODY is similar to PTON in that it would perform better during a COVID surge because less people would go into a gym and would prefer at-home workouts. However, these events are big revenue drivers for BODY so it has a diversified business model that can thrive in both types of environments. Additionally, as BODY begins to get more subscribers, it has an opportunity to sell them on the nutritional products, which can reinvigorate this category for BODY.
It is worth noting that many major companies from Facebook (FB), to Snapchat (SNAP) and PTON noted that Apple's (AAPL) iOS 14.5 changes proved challenging and increased their marketing costs while simultaneously making them less efficient. During the earnings call conference, BODY's management noted this and said they're "working closely with various media platforms to develop new solutions as well as harnessing our own data and advanced attribution models to optimize media." Fixing this issue can greatly improve BODY's return to profitability.
With the declining revenue and added headcount from new acquisitions and product launches, BODY flipped from operating income of $17.87 million in the same period last year to a loss of $71.82 million last quarter. However, I think BODY can reverse this and stoke revenue growth from their new launches and use their ad dollars more effectively once they figure out the impacts from the new iOS update. The new product category of having the bike will bring new customers to the platform and help their flywheel of cross-selling nutrition products. Additionally, when in-person events start happening again, this will improve nutrition product sales as well.
Cash
As of September 30, 2021, BODY had approximately $200 million of cash on its balance sheet and $32 million of borrowing capacity available under their credit facility. In the nine months ended in September 30, 2021, BODY used $139 million in cash for operating activities and $108.35 million in investing activities. Those are staggering figures and make one think they would run out of cash soon when extrapolating out those figures. However, when you dig into them further, the figures aren't so scary.
Of that $139 million in cash used for operating activities, $71.2 million represented a net change in operating assets and liabilities, consisting of a $68.8 million increase in inventory, a $22 million increase in content assets and a $5.6 million increase of other assets (which was partially offset by a $27.1 million increase in deferred revenue). Additionally, BODY prudently invested in Myx and Ladder and those investments reduced cash flow by approximately $108.35 million. Finally, management is being prudent and given the pivot to work from anywhere, it has assigned the three years of its Santa Monica office lease, saving approximately $5 million in 2021 and $9 million annually through 2025. BODY is not as cash flow negative as the headline numbers suggest.
BOD Interactive
Another reason that earnings were not as good as analysts had projected was the delayed launch of BOD Interactive or BODi. This is an additional premium subscription that can be purchased on top of Beachbody on Demand and provides an immersive personalized experience. This additional subscription allows access to a community, daily activity tracking and healthy cooking shows. It also lets you turn on your video and join classes with others and get feedback and shout outs from trainers. For those who crave workouts with others, they can subscribe to BODi. Management described the upside well in the earnings call:
With the launch of BOD Interactive in late October, we now have a powerful lever to drive acquisition, upsell and increase lifetime value with an offering that replicates the immersive and personalized experience of boutique fitness classes in a digital context.
Because this product was not ready and included interactive cycling content, BODY did not promote their bike across campaigns. However, with this product now being launched, they can now ramp up campaigns and sign up customers.
Valuation
With BODY's precipitous decline since its SPAC, it currently trades with an enterprise value of just $419 million, down from over $3 billion from when it first started to trade. With total revenue guidance of between $820 million to $830 million in 2021 and 75% of that revenue coming from subscription-based revenue products, BODY presents as an exceptional value.
Moreover, if you look at its balance sheet, the picture only gets rosier. BODY has no debt with a nice cash position of approximately $200 million. Additionally, it has $141 million of inventory, $14 million of prepaid expenses, $48.5 million of other current assets as well as $115.4 million of property and equipment. On the liability side, it has current liabilities of $277.67 million, with deferred revenue constituting the largest segment with $127.89 million. Additionally, its largest long-term liability was its lease, at approximately $24 million, which as discussed earlier, will be removed since it assigned that lease.
Source: 10-Q
Finally, it is worth mentioning that BODY has approximately $20 million of warrant liabilities on their balance sheet, which are from its SPAC transaction. Each of these warrants are exercisable at a price per share of $11.50, subject to adjustments. These warrants are pretty far out of the money right now and have less than 5 years remaining on them before they expire.
There are a total of 15,333,333 warrants outstanding that could be converted into Class A common stock if exercised. With the current trading range of only $0.258 per warrant, the market is betting that these warrants will expire unexercised, and if that occurs, this warrant liability will be extinguished. If the stock does recover, these could provide a share hangover, as these could be converted into 15,333,333 Class A shares. Regardless, if you invest at these levels and the stock broaches the $11.50 level, I think most investors would be fine with the dilution after that return.
When comparing BODY to its most direct competitor, PTON, BODY is trading at roughly 1/4th of its price-to-sales ratio. Sure, PTON is a larger company with more revenue and brand value, but I do not think it warrants such a large divergence in the trading range.
Furthermore, BODY has a notable edge over PTON - its revenue consists of 75% subscription revenue while PTON's is just under 30%. Subscription revenue with a high retention rate is really valuable and a potential acquirer would view this very favorably.
Conclusion
BODY has been a terrible investment since its SPAC and has rightly been chastised by the market. However, I think the selloff has been overdone and believe BODY represents and asymmetric risk/reward opportunity.
Jeffrey Himelson
Jeffrey Himelson is a corporate lawyerpracticing in NYC.He previously worked as a research analyst at a hedge fund and graduated from Columbia Law School in 2017. He is best known on Seeking Alpha for his article "The Trade That Netted Me More Than a 2000% Return."Mr. Himelson is also the author of a book series to teach kids about business: Kimmy and Jimmy's Business Adventures.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BODY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
