On Friday, Lake Street Capital Markets adjusted its price target for Xponential Fitness Inc (NYSE:XPOF), reducing it to $32.00 from the previous $41.00, while retaining a Buy rating on the stock. The firm's analyst cited a valuation disconnect between the company's fundamental business performance and its stock market representation as a reason for the modification.
The analyst from Lake Street Capital Markets expressed confidence in Xponential Fitness, highlighting the company's business model and its capability to drive EBITDA growth.
The top-performing brands with higher Average Unit Volume (AUV) were noted as contributing a major share of system-wide sales and EBITDA. The expectation that the company will continue to open more studios was seen as a positive move that would allow Xponential Fitness to scale up and enhance profitability.
Xponential Fitness is anticipated to achieve an EBITDA margin expansion to 40% in 2024. The analyst pointed out that as EBITDA grows, the company is expected to generate more free cash flow, with an estimated conversion rate of approximately 70% of EBITDA to free cash flow.
Despite the company's progress and absence of signs of weakness, the valuation has declined from its peak multiple of 18x EBITDA to below 5x the projected EBITDA for the next year.
The revision of the price target to $32 is based on the current compression of multiples. However, the analyst maintains that the long-term investment thesis remains solid and that Xponential Fitness has consistently demonstrated its ability to follow through on its growth-oriented business model.
With approximately 6,000 licenses sold worldwide and only about 3,000 studios currently open, there is a clear pathway to future growth. The analyst concluded by expressing optimism that as Xponential Fitness continues to validate its growth model, investor sentiment will likely improve, potentially leading to an increase in the stock's valuation multiple.
InvestingPro Insights
As Xponential Fitness Inc (NYSE:XPOF) navigates the market, real-time data from InvestingPro offers additional context to Lake Street Capital Markets' revised price target. A notable highlight is the company's impressive gross profit margin, which stood at a robust 69.69% over the last twelve months as of Q1 2023. This figure underscores the company's efficiency in managing its cost of goods sold and is a testament to the strength of its business model, aligning with the analyst's confidence in its ability to drive EBITDA growth.
InvestingPro Tips indicate that management's aggressive share buyback strategy and the fact that analysts predict the company will be profitable this year could provide a foundation for investor confidence. Additionally, Xponential Fitness's stock has experienced a strong return over the last three months, with a price total return of 25.35%, suggesting a potential rebound in investor sentiment.
While the company's P/E ratio stands at 12.69, indicating a low valuation relative to near-term earnings growth, it's also worth noting that four analysts have revised their earnings downwards for the upcoming period. This mixed outlook suggests that investors should keep a close eye on upcoming earnings reports and management commentary for further insights into the company's trajectory.
For those looking to delve deeper into Xponential Fitness's financials and future prospects, InvestingPro offers additional insights and metrics. With the use of coupon code PRONEWS24, investors can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to a wealth of data and analysis to inform investment decisions. Moreover, there are 9 additional InvestingPro Tips available for XPOF at https://www.investing.com/pro/XPOF, which could offer further guidance for those evaluating the company's stock.
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