We came across a bullish thesis on Xponential Fitness, Inc. (XPOF) on Substack by Inflexio Research. In this article, we will summarize the bulls’ thesis on XPOF. Xponential Fitness, Inc. (XPOF)’s share was trading at $17.33 as of Feb 14th. XPOF’s trailing and forward P/E were 25.80 and 17.86 respectively according to Yahoo Finance.
A group of people in a fitness class with connected fitness products in a studio or gym.
Xponential Fitness presents a compelling investment case despite recent challenges and market skepticism, largely driven by a short-seller report in mid-2023 that triggered a steep decline in its stock price. The company, a leading franchisor of boutique fitness studios, owns and licenses eight fitness brands, with Club Pilates and Stretch Lab serving as its crown jewels. With a network of 3,178 studios worldwide and system-wide sales of $1.6 billion, Xponential surpassed Orange Theory during the pandemic and solidified its position as a global fitness powerhouse. However, allegations regarding governance and underperforming studios led to a stock price plunge from $27 to $7.49. In response, the company has undergone significant restructuring, which includes operational improvements, a revamped management team, and strategic divestitures of underperforming brands like Row House and STRIDE Fitness. This restructuring, coupled with key board appointments such as Jeffrey Lawrence, former CFO of Domino’s Pizza, and Mark King, former CEO of Taco Bell, has bolstered investor confidence.
Xponential’s governance issues are now behind it, and the company’s strategic focus is firmly set on long-term growth, particularly through its substantial franchise pipeline. By the end of Q3 2024, the company had 1,980 franchise licenses sold but not yet opened, representing a 62% increase over its current unit base. This strong growth pipeline positions Xponential for significant international expansion, especially in its core brands, Club Pilates and Stretch Lab. Management has forecasted the opening of 300-400 net new studios annually, reflecting mid-single-digit same-studio growth and double-digit unit growth. With these plans in place, the company is targeting over 8,000 units in the U.S., with substantial expansion abroad. Despite the market’s current undervaluation, Xponential’s future prospects remain robust, supported by its substantial backlog of franchise contracts and strong brand positioning.
The company is expected to generate $80-90 million in free cash flow (FCF) by 2025, offering an attractive 10% FCF yield. This is set to grow substantially over the following years, with FCF per share projected to reach $3.40 by 2028. Strategic initiatives, including new franchise agreements and aggressive international expansion, are expected to drive this growth. Xponential’s market cap is currently around $600 million, and its stock is trading at a significant discount compared to peers. In contrast, similar companies in the franchise space trade at multiples of 17.5x 2025 EBITDA and 27.6x EPS. Xponential’s discounted stock price represents a unique opportunity for investors, with potential for significant upside as the company executes its growth strategy.
The company’s stock could rise substantially in the coming years. Using a simple model, a 30% reduction in share count through aggressive buybacks could lead to a higher FCF per share, positioning Xponential to trade at 7.5x FCF by 2026 and 5.2x FCF by 2028. Under these assumptions, Xponential’s stock price could reach $43 by 2028, a 150% upside from its current price of $17.35. A more aggressive 20x FCF multiple would push the target price to $60, representing a 242% upside. While risks remain, such as the company’s reliance on a small number of brands and potential franchisee churn, the strategic initiatives and leadership changes in place suggest that Xponential is poised for substantial growth. With its strong market position, proven growth model, and undervaluation relative to peers, Xponential Fitness represents an excellent investment opportunity with significant upside potential.
Xponential Fitness, Inc. (XPOF) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 22 hedge fund portfolios held XPOF at the end of the third quarter which was 26 in the previous quarter. While we acknowledge the risk and potential of XPOF as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than XPOF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.