Equity investments of the Life Time group (NYSE:NYSE: LTH) held its IPO on Thursday and its results could have been better. According to the Minnesota Star-Tribune, the company raised $ 702 million by selling 39 million shares for $ 18. one share and closed its first day of trading lower at $ 17.75 per share. With over 198 million shares outstanding according to his prospectusthe fitness company has a market capitalization of $ 3.5 billion.
Life Time is a fitness company known for its gyms, and some investors will be skeptical of investing in this industry as COVID continues to remain an issue. The company also faces further concerns such as high debt. However, these downsides mean that Life Time may actually be a valuable investment as its price isn’t that high.
How fitness has to fit
Life Time operates gyms throughout the United States and in its prospectus states that it had 154 centers as of July 31, 2021. It also plans to open six more centers in 2021 and another 20 centers in 2022 and 2023.
The number of centers has grown steadily over the past few years, but the number of signups embodies investor concerns about this company and COVID. Life Time had 854,000 subscriptions in 2019, but then the number plummeted to 501,000 in 2020 due to the pandemic. Subscriptions have since returned to 674,000, but growth at the end of 2021 has also slowed as COVID fears have started to rise again.
Life Time says its members will continue to recover and improve its digital skills. This includes digital subscriptions that allow members to stream workout classes, including a partnership with Apple Fitness +. And it’s true that with continued concerns about obesity and exercise, especially in the aftermath of the pandemic, the exercise market will continue to grow. Life Time estimates that the US wellness market can be estimated at around $ 900 billion, and an increased focus on health due to the pandemic and the closure of gyms across the country offers it a new chance.
Finances and valuation
Life Time uses its income as proof of its claim that it had continued success before COVID caused so much damage. Its revenue increased steadily from 2000 to 2019 to reach $ 1.9 billion, before COVID cut its revenue by more than half in 2020. Life Time posted revenue of $ 572 million in the first half of 2021. up 17% over the same period in 2020.
It’s true that the COVID pandemic will go away at some point even in the worst-case scenario, and Life Time’s steady revenue growth story shows it can continue to grow once fears inevitably dissipate. And as previously mentioned, the company’s virtual moves could help provide security and further growth.
However, the fact remains that whatever the future of Life Time is, its present numbers are far from impressive. In addition to concerns about its revenue, Life Time lost $ 229 million in the first half of 2021, as well as $ 360 million in 2020. The company was profitable before the pandemic, so it can argue that this profitability will return when things return to normal. . But it may take some time.
Additionally, Life Time is burning cash, losing a net loss of $ 13 million to operations in the first half of 2021. As a result of the last difficult year, Life Time has over $ 2.3 billion in debt. In fact, the company plans to use the raised IPO procedure to pay off its debt, which is normally a bad sign for the IPO and early investors.
In summary, while Life Time’s finances could improve with changing economic conditions, the current picture isn’t pretty. It is difficult to say when the company will be profitable nor is it easy to say how much or if it will continue to grow in the future. Everything revolves around COVID.
Perhaps the good news is that, due to these financial woes, Life Time’s $ 3.5 billion valuation appears to be quite reasonable. Its debt, combined with $ 104 million in cash, means Life Time has a business value of approximately $ 5.7 billion. If we extrapolate Life Time’s H1 2021 revenue for the full year, this gives the company an EV / revenue ratio of approximately 4.98.
In comparison, Life Time’s competitor Planet Fitness (NYSE: PLNT) has an EV / revenue ratio of around 15. Life Time certainly looks like a value buy in comparison, but there’s the question of whether either company is a good one. investment given the difficulties in this market.
A difficult decision
Most IPOs are companies that are nearing their peak, so institutional investors choose to sell their shares now, often at the expense of new investors. This is one reason why IPOs are difficult value investments.
Life Time seems to be different in comparison. The company faces many difficult challenges, mainly related to the company’s ability to recover from COVID. Its finances have been hit hard by the pandemic and it is difficult to predict when it will recover. But on the other hand, the company’s valuation appears to be low compared to other major competitors who are struggling.
Given this obscure picture, it’s probably best to wait until we have more information. Can Life Time show a constant ability to grow in the future? Will the COVID situation in the US and the world get better or worse? Until these and other questions are answered, investors should be cautious about this company despite its low value.