In the past few months, several dramatic measures have been taken to combat the coronavirus, from mandatory quarantines and lockdowns to stay-at-home orders. In many places in the U.S., the measures have failed to contain the deadly SARS-CoV-2, and many Americans feel uneasy about partaking in group activities. As a result, the demand for at-home digital health and fitness services has skyrocketed.
Take, for example, WW International (WW -13.17%) and Peloton Interactive (PTON -1.26%), whose stocks rallied by more than 25% and 100%, respectively, in the past three months. That completely dominates the S&P 500's return of 14% during the same period. What's more, I think the two stocks' rallies are far from over.
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A weight loss giant
One of the most prominent stocks in the health and wellness industry is WW International. It's backed by celebrity icon Oprah, who serves as a brand ambassador and advisor and is a major shareholder in the company, owning 8% of its outstanding shares.
Due to COVID-19, demand for the company's at-home weight loss programs and coaching sessions have been soaring. The company reported 46.2 million digital paid weeks in the first quarter of 2020, representing an 18.5% growth from the same period last year. Meanwhile, the company brought in record revenue amounting to $400.4 million, a 10.2% year-over-year increase.
WW International's eHealth services now account for nearly 70% of its subscriber base of 5 million. At the same time, the company has ample liquidity to navigate itself through the pandemic, with $293.3 million in cash on hand, and a net loss that narrowed by 44% this year compared to Q1 2019.
The company is withdrawing its annual guidance due to uncertainty surrounding COVID-19. WW International operates more than 3,000 retail fitness workshops across the country, many of which were forced to shut down (while still owing rent) when the COVID-19 pandemic reached the U.S. in mid-March, and it wasn't until June that many of them reopened. There are now concerns the workshops may shut down yet again due to a second wave of COVID-19.
However, the mitigating factor is that the second wave is a lot less severe than the first wave of the coronavirus in the U.S. Unlike the first wave, the infected in the second wave are younger individuals, the overwhelming majority of whom develop milder symptoms. Hence, it is unlikely states will revert back to imposing draconian measures to contain the COVID-19 pandemic.
As a result, I fully expect WW International's fitness workshops to stay open and make back most of the lost revenue lost in the past couple of months. With soaring numbers of digital wellness subscribers and a price-to-sales ratio of just 1.1, I think investors interested in WW international will be paying for superb growth at rock-bottom prices.
Image source: Getty Images.
A luxury indoor cycling service provider
Peloton is a manufacturer of high-end home bicycles, each featuring a Wi-Fi enabled 22-inch touchscreen tablet. Not only can people enjoy the cycling experience from the comfort of their own home, but they can also use the tablet to stream on-demand classes from coaches or compete with other participants. The bikes come with a large price tag, with each bike costing $2,245 (delivery included) and $39 per month for a mandatory one-year subscription for the digital streams.
However, the price has not deterred many Americans' commitment to cardio. In its fiscal third quarter of 2020, Peloton's ending connected fitness subscribers grew by a staggering 94% year over year to 886,100. Meanwhile, the number of subscribers viewing Peloton's fitness content, but who not possess a Peloton bike, grew by 64% to 176,100 subscribers. The company now has a total of 2.6 million members.
At the same time, the company's revenue grew by 66% year over year during the quarter to $524.6 million. Peloton managed to boost its overall gross margin to 47%, with subscription margins reaching approximately 60%. In addition, the company posted a profit of $23.5 million in terms of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
The company expects its full-year 2020 revenue to reach approximately $1.73 billion. While the stock is expensive at 10.4 times price-to-sales, investors should keep in mind they are getting a high-end fitness stock that is expected to grow its revenue and subscriber count 89% and 104%, respecively, this year.
Moreover, the company is in a superb financial position with $1.4 billion in cash, and no debt whatsoever. Hence, I think healthcare investors should give Peloton's stock a shot.
