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Nautilus Stock: Cheaper Connected Fitness Play

Oct. 03, 2021 5:19 AM ETBowFlex Inc. (BFX)28 Comments
PG Research profile picture
PG Research


  • Nautilus is a smaller player in the connected fitness industry which is undergoing a business transformation.
  • The company seems to be currently undervalued assuming continuity of the business.
  • The major risks to the bull thesis are the lack of scale, the potential oversaturation of the market as well as the continued at-home fitness trend after covid.

woman leaving house on bicycle

Tara Moore/DigitalVision via Getty Images

Investment Thesis

The current price of Nautilus (NLS) suggests that the company does not have a bright future ahead of itself. I think it seems undervalued based on fundamentals and might have some upside if the management can execute well

This article was written by

PG Research profile picture
I am a second-year PE analyst working in Hong Kong. In my free time, I invest my own money in stocks. I usually write about whatever I feel is worth writing about with a focus on value or where I see value to also invest myself. I will state clearly if I have a position in the stock already or if I want to initiate one. Moreover, I sometimes also write about Company's which are interesting to me but might be overvalued in my view as a warning for investors. I am new to secondary market investments and still testing the waters a bit as I only started out at the beginning of 2021. I have a bachelor's in economics and a master's in international business.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NLS either through stock ownership, options, or other derivatives. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (28)

Add Value profile picture
I think for anyone interested and in NLS (as I am), have a look at my new article on the industry. I bring industry research to the discussion.
@Add Value thank you 🙏
Thanks for this article!
Strategy is right but boy, current numbers are ugly.

Very unlucky with the supply chain situation.

There could be a positive surprise from holiday season as they’ve massively built up inventory
PG Research profile picture
@GwailoHK Yeah I saw the inventory build-up, but hope it will actually get sold then... but you are right numbers don't look pretty but they sounded quite confident on the earnings call but I guess everyone does sound confident on the earnings call :)
Add Value profile picture
@PG Research I will say that I believe that earnings call was not as bad as the market perceived. It appears that their JRNY timeline is moved up one year.
@Michael Abd El Meseah I agree. I like this little company and its undervalued. The market was to harsh. No its not the next peloton. But thats not necessary. With the TAM and new strategy there is a lot of upside. I do agree with the discribed risk by the author (@PG Research). Still, i keep buying at these levels. And i will follow it closley. I would be awesome it insiders would buy more. Put you money where your mouth is. ;)
AlexL1 profile picture
25 Oct. 2021
Hi Folks, I'm courious to know what you think about the recent s-3/a filling from NLS?
PG Research profile picture
@alexandre Lane Hey, I have seen it but currently no thoughts on it to be honest. They didn't state a clear purpose yet other than corporate expenses. So, everything would be mere speculation, will be interesting to see when they actually make use of it. What do you think?
ietgods profile picture
Hi Folks,

Just like to say that I really appreciate the article and subsequent intelligent discussions in the comments. I don’t have much to contribute except that I’m deep value investor who just 10x’d my portfolio in the last year (mostly via oil and gas) looking to diversify, and am on the lookout for other (unreasonably) cheap and hated stocks…

I’m an ex lunk-head and haven’t been following the rise of Peleton closely (IMO on a cursory glance - seems like just another “tech bubble” type stock), but back in the day when I was throwing weights around - Nautilus was legendary… Arthur Jones, Mike Mentzer, Casey Viator all legends associated with Nautilus.

I’ve trained to be a personal trainer and have worked in exercise equipment sales and repair. To me if you say “Nautilus” in regards to exercise equipment (commercial equipment admittedly) it’s equivalent to saying “Rolex” when it comes to watches. You say “Peleton” and I think of little kids getting sucked under treadmills. Maybe at 42 I’m too old now…

Disappointed to find out that it appears that the commercial side of Nautilus has nothing to do with the “home fitness” side as I’d believe it would give this company the “street cred” it could use along with synergies… not sure the Nautilus name has a lot of value anymore for anyone younger than myself.

That being said I’ll keep NLS on my “watch list” for now… it’s still not cheap enough to be a no-brainer for me. If they still had the commercial machines I’d buy in as if people leave home for the gym again, you’d be covered as I think people will be looking to get out and socialize over the next few years and not stay at home!

I’d also look for a bit of an uptrend before buying (never a good idea to try to buy right at the bottom, stocks can both go lower or higher than you could ever imagine).
PG Research profile picture
@ietgods Thanks a lot for your reply, really appreciate it and congrats on your 10x, that's awesome!
What "fair value" would you give Nautilus?
ietgods profile picture
@PG Research you know, I'm just totally lost when it comes to a valuation for NLS.

I know oil and gas and which are the lower cost plays, pretty easy to run valuations and pick out winners and losers, and read PV10 numbers and look for bargains. It was a no-brainer to pick those up in the energy price crash in 2020 (oil price wasn't going stay negative for long, and I know for a fact it costs actually $40 barrel to produce), just buy the lowest cost producers that you know have a decent enough balance sheet to survive and wait - make 10x (plus) in a year. Helps to work in industry too I guess.

I look at the metrics for Peloton and look a the metrics for NLS and there is no comparison. Since Peloton has no earnings, the PE, EBITDA metrics are out the window... Just comparing EV to sales, Peloton is trading at EV to sales over 6 and NLS is like 0.38... so one could say that makes NLS an easy 10x from here... especially since those NLS sales come with earnings and profits!

This market is so damn crazy... It's like trying to compare GM to TSLA, either one is worth WAY more, or the the other WAY less. Actually, apparently Stellantis is the value play in automotive right now...

Proper play here would really be to short Peloton and go long Nautilus, but that's way too smart for this market. Is there another comparable "home exercise stock" to be running metrics on?

Looking at the numbers I'd think with the good balance sheet, good profitability and all that... Just in isolation, I think NLS should be trading around $25 if I had to give it a target... based on the metrics (and I'm a very cheap deep value investor, I'm not into "growth" at all, PE over 10 and I'll bail in general).

You might have me convinced me to nibble, I just sold more O&G today (not because I don't think there's more upside - but just to re-balance).
r Negoro profile picture
@ietgods and you made trade of the month. Pton tanked so bad.
Great article thanks. I am long NLS but my major concern is how PTON is so much more polished in their products and their app that I wonder if this isn’t a winner takes all market. What about BODY as a competitor here - they have a connected bike as well?
PG Research profile picture
@patrick.quest Thanks for the feedback, really appreciate it!
I also checked BODY, and to be honest, I think a combination of the two would make so much sense in my view. BODY only recently got into connected bikes when they merged with another equipment company in the SPAC deal. The revenue from connected fitness equipment is still relatively small only around 3% of total revenue but they are huge in nutrition and have over 2.7m digital subscriptions.
r Negoro profile picture
@patrick.quest pton is a mess. Dont touch it.
Microdeity profile picture
Good effort, well articulated reasoning and explanations, especially liked challenging management's 1 billion revenue target. Much appreciated.

A couple of additions regarding some statements in the article that may be helpful to set the record straight and aid in future articles.

1- "Management does not own enough shares". They have 1.06 million stock options and RSUs with a weighted average price of $2.20 according to 10-K. I would say even with the current share price it is a very strong incentive and aligns shareholder and management interest.

2- Marketing and sales comparison is not a very good comparable on its own. Also M&S is not a great predictor of long term success in my opinion, companies with biggest marketing budgets do not always conquer the market. It would be better to split marketing from sales and break down other costs (stock compensation) for more direct comparison. Finally, especially for online and social media advertising the incremental spending hardly justifies the marginal returns in my opinion and experience.

3-Product comparison with competitors. I missed this part the most in the article for a product company. There is a positive buzz from customers about NLS brands like Bowflex leaning exercise bike and products get good reviews. In an expanding market there is room for several competitors to thrive and grow.

4-Business model analysis. NLS is company with a profitable hardware sales business (excepting 2019) for past 10 years trying to add a 2nd revenue stream through JRNY with a recurrent subscription model. But as they are a hardware first business, the connected fitness equipment works also with competitor's applications (e.g Peloton). Opening connected fitness equipment to other brands' apps is not a bad competitive move.

I agree with the seemingly low valuation at the moment (using a more conservative calculation there seems to be around 30% gap in the intrinsic value of company versus current share price of $10).

The threat I see is less from competition and more from sustained global supply chain pressure creating bottlenecks and cost increases which is compressing gross margins by more than 13% YoY, from 43.7% to 30% in latest quarter. Though, It looks to me they're doing a little better in cost management than Peloton Interactive whose gross margin is at 27%.
PG Research profile picture
@Microdeity Thanks a lot for taking the time to read the article and the great inputs!

I agree with the points you made just think that the general share amount as % of the total share is rather on the low side. There is some alignment but with a strike price of 2.20 which seems to be based on the very worst trading period of Nautilus, it's kinda hard to say how much incentive they still have as they basically just need to keep the company afloat to make a profit out of their options.

I tried to keep it on the shorter end and focus more on number valuation as other articles discussed the business model before, but I agree a thorough analysis would certainly include more details as you mentioned.

What do you think of the fact that they allow users to use Peloton on their machines? On one hand, I like it as it provides more flexibility and might attract more people who might prefer Peloton app but Nautilus bike. On the other hand, isn't it a shot in the knee if they also want to develop their own fitness app and focus on that? I think subscription revenue would be much more predictable whereas if they position as a hardware sales company the rather long replacement cycle might be an issue? To be honest I am kinda split on that part.
Microdeity profile picture
@PG Research Thanks for the reply. For a challenger with immaterial number of subs at the moment, app agnosticity is the right way to compete with Peleton and others, if it helps them sell extra fitness hardware to fund JRNY. I don't know the costs to judge if recurrent subscription business will be better and more profitable than hardware sales and will lead to higher revenue and profits for NLS. What if it leads to more top line but lowers profits consistently?

I think it is speculative to value JRNY subscriptions at the moment and will wait until there is more clarity, NLS breaking out the development and content costs, nr of quarterly subs, churn, etc figures to assess it as a standalone business. Till then my solution for value investing is to not to pay for the unproven subscription side of the business and apply a higher discount factor to future cash flows.
PG Research profile picture
Thanks a lot for the good insights, this is very helpful. It's good to hear that it is beneficial for them to allow other apps on their platform.
With the subscription, I was more talking about the predictability of the revenues as hardware sales might be more volatile but just a guess. For profitability, I am also not sure when looking at the EBIT level, but when looking at Peloton and iFit their Gross Margin for the subscription part is much higher than the hardware sales with 62% and 87% Gross Margin respectively.

But I certainly agree that JRNY subscriptions should not be valued as of yet as it's still not a meaningful part of the business.
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