On Monday, Lake Street Capital Markets adjusted its price target for Xponential Fitness Inc (NYSE:XPOF), reducing it to $32.00 from the previous $41.00, while maintaining a Buy rating on the stock. The firm's analyst cited a strong belief in the company's business fundamentals, despite recent stock performance not reflecting this.
The analyst emphasized the robustness of Xponential Fitness's business model and its capability to drive EBITDA growth. Notably, the company's top-performing brands with higher Average Unit Volume (AUV) are contributing significantly to system-wide sales and EBITDA. The expectation is that as Xponential Fitness continues to open more studios, it will achieve greater scale and profitability.
The company is anticipated to see an EBITDA margin expansion to 40% in 2024. With EBITDA growth, the firm projects that Xponential will generate increased free cash flow, estimating a 70% conversion rate from EBITDA to free cash flow. Despite the company's progress and absence of performance weaknesses, the analyst observed that the valuation has decreased from its peak multiple of 18x EBITDA to below 5x the projected EBITDA for the next year.
The reassessment of the price target to $32 reflects the current multiple compression. However, the analyst remains confident in the long-term potential of Xponential Fitness, highlighting the company's proven ability to execute its high-growth strategy. With approximately 6,000 licenses sold worldwide and only about 3,000 studios currently open, there is clear visibility into the company's potential for future growth.
Lake Street Capital Markets anticipates that as Xponential Fitness continues to validate its high-growth model, investor sentiment will improve, potentially leading to an increase in the stock's valuation multiple.
InvestingPro Insights
As Xponential Fitness Inc (NYSE:XPOF) navigates through a period of market recalibration, InvestingPro data offers a comprehensive view of the company's financial health and market position. With a market capitalization of $404.56 million, XPOF is trading at a P/E ratio of 10.86, showcasing its earnings relative to its share price. Interestingly, the company's gross profit margins stand impressively high at 69.69%, reflecting efficient operations and strong pricing power.
Two notable InvestingPro Tips highlight that XPOF's management has been actively buying back shares, a sign of confidence in the company's value, and that the stock is trading at a low P/E ratio relative to near-term earnings growth, suggesting potential undervaluation. Additionally, analysts predict that Xponential will be profitable this year, further affirming the positive outlook shared by Lake Street Capital Markets.
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