Xponential Fitness (XPOF -3.42%) is flying under the radar of many investors, but it's quietly becoming one of the market's top growth stocks. In fact, the stock's growth has been so impressive that it's one of the few growth stocks in the green over the past year, posting an outstanding 20% gain over the last 12 months. The S&P 500 and Nasdaq Composite are down 18% and 29%, respectively, over the same time frame.

Here's why it looks like shares of Xponential Fitness could have plenty of room to keep rising over the long term.

Person boxing with trainer at gym.

Image source: Getty Images.

What is Xponential Fitness?  

Xponential Fitness is a fast-growing franchisor of a portfolio of boutique fitness studios, including brands such as Club Pilates, Pure Barre, CycleBar, Rumble, and more. Its franchises focus on specific fitness disciplines, ranging from pilates and yoga to boxing.

Xponential Fitness is the world's largest franchisor of boutique fitness brands. Its total footprint of 2,100 U.S. studios is nearly double that of its next-largest competitor, Orange Theory, which had 1,191 locations as of September. 

Red-hot revenue growth 

In its most recent quarter (ended June 30), Xponential Fitness wowed investors by growing revenue a scorching 66% year over year to $59.6 million -- and at a time when some observers expected revenue to decline because of rising inflation and falling consumer spending power.

Xponential Fitness is guiding to $70 million in adjusted EBITDA for fiscal 2022, which would be nearly triple the $27 million it posted in fiscal 2021 and seven times higher than the $10 million it earned in 2020, although it should be noted that 2020's results are probably artificially low because COVID caused many gyms and fitness studios to close down. 

The company is growing revenue at an impressive rate, from $59 million in 2018 to the $216 million it is guiding to in 2022, which would amount to a scorching 29.3% compound annual growth rate (CAGR).

Recurring, resilient revenue

Xponential Fitness is a franchisor, and it's growing earnings and revenue at this red-hot rate by acquiring brands, signing up new franchisees, and opening new locations. It has grown to 10 brands in just a few short years, and has nearly tripled its total locations, from 818 in 2017 to 2,357 at the end of the second quarter of 2022.

The footprint should continue to keep growing as the company says its franchisees are contractually obligated to open an additional 1,881 new North American locations. Xponential says that it offers an attractive value proposition for franchisees with 25% to 30% operating margins, a two-and-a-half-year payback period, and a 40% cash on cash return.

The more franchises that open, the more royalty fees the company can collect, and as an asset-light franchisor, a large portion of these fees will flow right through to its free cash flow. This franchise-based model is particularly attractive because it gives the company predictable, recurring revenue streams. The franchise model is also advantageous in a time of rising inflation, as the royalty fees are based on the revenue of franchisees, not profits, which could come down as costs rise.

I also like the fact that Xponential Fitness is thinking outside the box with additional efforts to grow its B2B (business to business) offerings in creative ways. For example, Xponential is teaming up with Lululemon Athletica's  Mirror business to offer home workouts from four of its brands to the Mirror platform.

The company is also partnering with Celsius Holdings, one of the fastest-growing energy drink brands, and will feature its drinks at CycleBar locations. Additionally, Princess Cruises will offer various Xponential brands aboard its fleet of 15 ships via an exclusive partnership.

Xponential Fitness is a buy

All told, this looks like a compelling growth stock with plenty of runway. There are certainly some risks here. Another round of lockdowns or closures could bring the in-person fitness industry to a halt again like it did in 2020.

Furthermore, while the stock is not expensive, it is not cheap either. It has a multiple of about 15 times enterprise value/EBITDA based on the $68 million to $72 million in EBITDA the company is guiding to for 2022, which could come down if the broader market continues to struggle.

Perhaps the biggest challenge facing the stock is the fact that the fitness industry is notoriously fickle and has seen many fads come and go over the years. Look no further than the likes of Peloton and F45 Training for examples of fitness stocks that garnered a lot of hype as the latest trend but ultimately endured high-profile crashes, destroying a lot of shareholder capital in the process.

However, the fact that Xponential Fitness has a large portfolio of different brands, and the fact that this portfolio is always evolving, should help mitigate the risk of one particular brand or one style of exercise going out of fashion.

If Xponential Fitness can continue growing revenue by opening more franchises and continue growing profitability by converting this revenue into free cash flow, the stock could be worth considerably more than it is today.