What happened
Shares of gym chain Planet Fitness (PLNT -1.18%) fell 12.1% in May, according to data provided by S&P Global Market Intelligence. The company reported financial results for the first quarter of 2022 on May 10, which showed good operating results. However, analysts were quick to lower expectations and this appears to have pulled the share price down in May.
So what
Planet Fitness management didn't give revenue guidance for Q1, but analysts had expected Q1 revenue of about $190 million. The company didn't quite live up to these hopes -- it reported Q1 revenue of almost $187 million. However, it notably reached 16.2 million members in Q1, up from just 15.2 million members at the end of the previous quarter.
Even with a big jump in memberships, analysts didn't seem too impressed. The majority lowered their price targets for Planet Fitness stock following the Q1 report. For example, D.A. Davidson analyst Linda Bolton Weiser lowered her price target for Planet Fitness stock by 18% to $90 per share, according to The Fly. To be clear, Weiser still believes Planet Fitness stock is a buy. But her previous price target assumed a higher valuation for the stock than what she is assuming now.
Image source: Getty Images.
Herein lies a complicated subject. For years, seemingly nobody cared about stock valuations. But now it seems that it's the only thing that investors care about. And to be fair, Planet Fitness isn't a cheap stock. According to Yahoo! Finance, it currently trades at a price-to-earnings (P/E) valuation of 114. For perspective, the historical average for the S&P 500 is just 15.5, according to Yardeni Research.
Therefore, if you're looking for something trading at a below average P/E ratio, Planet Fitness isn't it.
Now what
Stock-market valuations rise and fall based on sentiment. But sentiment is hard to predict and there's more to investing than just thinking of valuation. For a company like Planet Fitness, I'd also ask questions like: Can it grow revenue? And can it grow earnings?
Regarding revenue, Planet Fitness management expects full-year 2022 revenue to increase over 50% from 2021 -- that's impressive. This growth is partly fueled by equipment sales to franchisees. For context, many upgrades had been delayed when locations were closed because of the pandemic. But these sales are normalizing now.
Planet Fitness also just signed an agreement for new locations in New Zealand, showing that expansion is still on the table. Therefore, there are still growth avenues for the company.
Moreover, Planet Fitness scales well since many costs are fixed. Because of this, it's gaining operating leverage and expects adjusted earnings per share (EPS) to grow more than 80% this year. So yes, the company can keep growing EPS.
To summarize, Planet Fitness might look expensive now. But if you hold a business that's growing like this, its share price will likely rise as well, even if its valuation goes up and down as sentiment vacillates.
