In the past few months, several dramatic measures have been taken to combat the coronavirus, including mandatory quarantines, lockdowns, and stay-at-home orders. In numerous 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 -0.64%) and Peloton Interactive (PTON -0.19%), whose stock prices have risen by more than 25% and 100%, respectively, over 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.
A weight loss giant
WW International is one of the most prominent stocks in the health and wellness industry. 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.
Because of COVID-19, demand for the company's at-home weight loss programs and coaching sessions has been soaring. The company reported 46.2 million "paid weeks" (weekly digital subscriptions) in the first quarter of 2020, representing 18.5% growth from the same period last year. Meanwhile, the company brought in record revenue amounting to more than $400 million, a 10.2% year-over-year increase.
WW International's digital health services now account for nearly 70% of its subscriber base of 5 million. And the company has ample liquidity to navigate through the pandemic, with $293.3 million in cash on hand, and a net loss that narrowed by 44% this year compared with Q1 2019.
The company is withdrawing its annual guidance because of the uncertainty surrounding COVID-19. The pandemic has affected WW's 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. It wasn't until June that many of them reopened, and now they may have to shut down again because of 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 expect WW International's fitness workshops to stay open and return to their pre-pandemic revenue numbers. With its soaring population 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.
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. This allows people to enjoy the cycling experience from the comfort of their own homes, and they can 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); there's also a mandatory $39 per month for a one-year subscription to the digital streams.
However, the price has not deterred many Americans' commitment to cardio. In its fiscal third quarter of 2020, Peloton's number of "connected fitness subscribers" (which the company defines as either a subscriber whose account is current, or one who has requested a "pause" of up to three months) grew by a staggering 94% year over year, to 886,100. Meanwhile, the number of people subscribing to Peloton's digital fitness content without actually owning a Peloton bike grew by 64%, to 176,100.
Revenue was up 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 $1.7 billion. While the stock is expensive at 10.4 times price-to-sales, investors should keep in mind that this high-end fitness stock that is expected to grow its revenue and subscriber count again this year, by 89% and 104% respectively.