Time To Move On From Nautilus
Summary
- NLS has been cut in half.
- But given it appears to be behind the competition, I don't see any upside catalysts.
- The valuation is fair enough, but there are issues with the chart as well.
At-home fitness OG Nautilus (NYSE:NLS) had a monster 2020. The pandemic saw its shares plummet to just two bucks before investors realized that at-home fitness would be a booming industry in a pandemic-stricken world. Shares subsequently hit $31 a few weeks ago, but have been cut in half since.
Source: StockCharts
Nautilus was punished around the same time that it became uncool to own growth stocks, but it is important to note that Nautilus is not a growth stock. I see Nautilus as having been punished because the at-home workout boom that powered its run has slowed - or at least the perception is that it will slow - and that the stock is now unattractive.
We'll begin with the chart as I think there is important evidence that the tough period Nautilus is in today may continue on for some time. I've noted the support/resistance area at ~$17 or so, which served as support numerous times over the past six months or so. That is now resistance as Nautilus plunged right through it in March, and that's very bad news for bulls.
I've also added arrows where Nautilus attempted to crest its declining 20-day exponential moving average, and until it is able to navigate that line and turn it higher, the downtrend will persist.
Finally, the bottom two panels show strong distribution of the stock (rather than accumulation), as well as very low and declining momentum. All of these characteristics taken together point to a very weak stock with little buying interest from institutions, and significant overhead resistance to navigate. To sum up the technical situation on Nautilus, I'll pass on the stock.
Now, astute readers will note that on New Year's Eve, I published a piece on Nautilus where I said it was cheap and worth a buy.
Source: Seeking Alpha
This panel would suggest I was woefully incorrect, as shares have moved 12% lower since then. However, shares rocketed 60%+ higher into February, less than two months after my bull call, so I don't actually think I was wrong at the time. I've changed my opinion on Nautilus - as you'll see below - because the situation has changed, and not because my bull call was incorrect. I'll stand by a 60%+ rally after a bull call any day of the week.
However, as I said, the situation has changed and investors are voting with their dollars and taking them elsewhere, and I simply don't see a reason to want to own Nautilus today.
"Strategy" looks a bit late
Nautilus was a broken company a few years ago. Its product line was stale, and revenue and profits showed this reality. The company recognized this, thankfully, and has taken steps to remedy the situation, but I still see Nautilus as a stale, old-school at-home fitness provider in a world of hip, cool (and popular) connected fitness apps.
Nautilus has taken the approach of assessing its current strengths and weaknesses and then trying to figure out where to go long-term. That sounds fine, but keep in mind how far ahead its competitors are in this space. Nautilus rested on its laurels for so long that its brands, which we can see below, are your parents' at-home fitness brands, not the ones that will be winning ten years from now.
Yes, Bowflex, Schwinn, and Nautilus are recognizable brands. But they could very easily still be associated with the uninspiring lack of innovation and quality issues that plagued the company for years.
Source: Investor presentation
Nautilus itself recognizes that it had these issues so I'm not saying anything radical here. But saying that your brands have high levels of awareness is not the same thing as consumers actually wanting to purchase something. Nautilus' problem is that it thought it could win just on its brand names, and that was proven unequivocally incorrect. Consumers demand more from their purchases now, and Nautilus is simply behind in this respect, producing analog, also-ran equipment in the way it has forever.
To be fair, Nautilus is now trying to better itself and close the gap.
Source: Investor presentation
It fairly recently unveiled its North Star program, but to me, this "strategy" just looks like what Nautilus didn't do for years and is now trying to implement so it doesn't fall further behind. The pillars listed here - adopting a consumer first mindset, investing in the business, improving the supply chain, and building a differentiated offering - are just things any business should do. Those are the things that separate great companies from lesser companies, and given where firms like Tonal, Lululemon, Peloton, and others are in their journeys, this is simply way too late. Nautilus is years behind already.
Nautilus is trying to embrace connected products, which is fine, but as I said, there are countless other solutions that are already winning in the marketplace. Nautilus now has to be much better than the alternatives to win, which is a tall task indeed.
Source: Investor presentation
The term "better late than never" comes to mind, but at least Nautilus is trying to move the needle. I don't doubt that the company's new products will help it remain relevant, but in terms of winning, late adopters have a difficult time coming out on top.
Financial projections
Nautilus says it wants to see $1 billion in revenue by fiscal 2026, which is ambitious to say the least. And as we'll see below, Nautilus is a very long way from hitting that goal.
Source: Seeking Alpha
Revenue suffered immensely in 2019, but the pandemic saw Nautilus in the right place in the right time, and revenue nearly doubled. Revenue should top out around $600 million, according to current expectations, which incidentally, is nowhere near $1 billion. While ambition is great and is the first step in terrific success, I feel like Nautilus may be overreaching here.
I have to imagine I'm not the only one because if the billion dollars of revenue were believed to be achievable, I don't think we'd see flat revenue for fiscal 2022. That would leave just four years to grow revenue by $400 million, or about two-thirds. Nautilus itself says its addressable market is growing at ~3% annually, so growing at that sort of rate, Nautilus is assuming it will take massive share gains. I'm simply unwilling to assume that given Nautilus' also-ran status in the past few years, and in particular, given the slate of offerings available from its competitors.
The same story is true for earnings, which we can see below, and the story isn't pretty.
Source: Seeking Alpha
Earnings estimates for next year are materially lower than this year, which is extremely unfortunate if you're a bull on the stock. Given the way that revenue appears to have topped out at $600 million, and how investments in growth initiatives look poised to reduce profits next year, I'm not sure I can make a case for the bulls.
The only positive I see for Nautilus given the above is that Nautilus is trading for a reasonable multiple.
Source: Seeking Alpha
Shares are at 7X this year's earnings, and about 9X next year's earnings. But with EPS currently expected to top out in fiscal 2021 and then fall precipitously subsequent to this year, there is no reasonable expectation that the valuation should move higher. This is the sort of valuation you see on companies that have stale or declining earnings expectations, and Nautilus fits both descriptions depending upon the time frame you're looking at.
Given all of this, I don't necessarily see a huge downturn in the share price, and because the stock has already been cut in half. However, upside catalysts are difficult to find. The company, in my view, is behind in its competition, and estimates reflect that. There are significant issues with the chart and with the fundamental situation the way it is, I simply think you should move past Nautilus and buy something else.
This article was written by
I've been covering financial markets for ten years, using a combination of technical and fundamental analysis to identify potential winners (and losers) early, particularly when it comes to growth stocks.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (12)
Bit dramatic. NLS does not have to be MUCH better...it needs to stay the course...which is not a tall task in the slightest.
Nautilus delivered on everything an investor would hope for: putting out aggressive subscription-based targets, drastically changing its marketing approach, improving the product line-up, and even putting out amazing revenue growth targets of 10% annually.And somehow you changed your "very bullish" rating to "neutral", while the stock declined 10% since your last article?
Based on what? Because their targets are too high? lol
My best guess is that your opinion is getting impacted by market sentiment.We are looking at a company targeting to grow 10%+ per year, valued at a free cash flow yield of 13%. Be greedy when others are fearful.Best, Robbe
