Lifetime Group Holdings (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 at $18 a share, and closed its first day of trading down at $17.75 per share. With over 198 million outstanding shares according to its prospectusthe fitness company has a market cap of $3.5 billion.
Life Time is a fitness company best known for its gyms, and some investors will be skeptical about investing in this sector as COVID continues to remain a problem. The company also faces additional concerns such as high debt. However, these downsides mean that Life Time could in fact be a value investment as its price is not that high.
How fitness must adapt
Life Time runs gyms throughout the United States, and states in its prospectus that it had 154 centers as of July 31, 2021. It also has plans to open six more centers in 2021 and 20 more centers in 2022 and 2023.
The number of centers has steadily grown over the past few years, but the number of memberships epitomizes the concerns investors have about this company and COVID. Life Time had 854,000 memberships in 2019, but then the number collapsed to 501,000 in 2020 because of the pandemic. Memberships have recovered to 674,000 since then, but even the growth in later 2021 has slowed as COVID fears have picked up again.
Life Time states that its membership will continue to recover and that it will enhance its digital capacities. This includes digital memberships which let members stream exercise classes, including a partnership with Apple Fitness+. And it is true that with continued concerns about obesity and exercise, especially in the aftermath of the pandemic, that 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 as well as the closure of gyms throughout the country gives it a new chance.
Finances and Valuation
Life Time uses its revenue as proof of its claim that it has been consistently successful before COVID caused so much damage. Its revenue had steadily increased from 2000 to 2019 to reach $1.9 billion, before COVID cuts its revenue by more than half in 2020. Life Time reported a revenue of $572 million in the first half of 2021, up 17% compared to the same period in 2020
It is true that the COVID pandemic is going to go away at some point even in the worst case scenario, and Life Time’s history of consistent revenue growth shows that it can continue to grow once the fears inevitably dissipate. And as mentioned above, the company’s virtual moves could help provide some security and additional growth.
However, the facts remain that whatever Life Time’s future may be, its present numbers are less than 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, and so can argue that this profitability will return as things return to normal . But that might take some time.
Furthermore, Life Time is burn cash, losing a net loss of $13 million through operating activities in the first half of 2021. As a result of the past difficult year, Life Time has over $2.3 billion in debt. In fact, the company plans to use its raised IPO proceedings to pay down its debt, something which is normally a negative sign for IPO and early investors.
In summation, while Life Time’s finances could improve depending on changing economic conditions, the current picture is not pretty. It is difficult to tell when the company will be profitable nor is it easy to tell how much or whether it will continue to grow going forward. Everything revolves around COVID.
Perhaps the good news is that due to these financial problems, Life Time’s valuation of $3.5 billion appears to be fairly reasonable. Its debt, combined with $104 million in cash on hand, means that Life Time has an enterprise value of about $5.7 billion. If we extrapolate Life Time’s 2021 first half revenue for the entire year, that gives the company an EV/revenue ratio of about 4.98.
By comparison, Life Time competitor Planet Fitness (NYSE:PLNT) has an EV/revenue ratio around 15. Life Time certainly looks like a value buy by comparison, but there is the question about whether either company is a good investment given the difficulties in this market.
A Difficult Decision
Most IPOs are companies which are approaching their peak, and so institutional investors choose to sell their stocks off now, often at the expense of newer investors. This is a reason why IPOs are difficult value investments.
Life time by comparison looks to be different. The company faces many difficult challenges, mostly relating 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 some other major competitors that are also struggling.
Given this murky picture, it is probably better to wait until we have more information. Can Life Time show a consistent ability to grow going forward? Will the COVID situation in the US and worldwide get better or worse? Until these and other questions are answered, investors should be cautious about this company despite its low value.