Here’s Why I’m Bearing on Weight Watchers Stock
Media Mogul Oprah Winfrey’s heavyweight celebrity endorsement on Monday has sent Weight Watchers International, Inc. (NYSE:WTW) for over a 108% gain in less than 24 hours. Oprah has decided to join the company’s board, taking up a 10% share in the company. What has followed is a frenzied herding behavior where we are seeing buyers suddenly racking up the stock. Is WTW stock really a value play, or will it dip once the trading activity settles?
Weight Watchers, as evident from its name, provides fitness and wellness services to members. The firm has both company-owned and franchised operations worldwide; across North America, the U.K., Europe, and the Middle East. Weight Watchers stock is extremely volatile with a history of steep declines and sharp surges, with the declines obviously outweighing the rallies. The stock has seen highs in the $80.00 range and lows in the $3.00 range. The recent consistent slide in its stock price has been an outcome of Weight Watchers’ slipping revenues and hiking debt burden.
Chart courtesy of www.StockCharts.com
The nutrition and fitness industry in general receives a lot of investor attention with many fitness product companies doing relatively well on the market this year. This includes nutrition company, Herbalife Ltd. (NYSE:HLF) and the recently IPO-ed manufacturer of wearable fitness tracking devices, Fitbit, Inc. (NYSE:FIT). But the problem with Weight Watchers lies in its business model that’s heavily weighted on its services—unlike Herbalife and Fitbit, that generate product-weighted revenue.
Competition Threats to Weight Watchers Stock
Weight Watchers basically thrives on a premium membership business model whereby members sign up for its fitness programs which are primarily of two kinds: the “online only program” and the “online plus meetings program.” The company also sells healthy foods and related wellness products on its web site and app, including magazines, cookbooks, and wellness readings. These, however, don’t account for the company’s core business.
How do the programs work? With the online program, users develop their fitness plan online with 24/7 support from the company. With the online plus meetings program, members get to meet people with first hand experiences and receive professional support in addition to receiving WTW’s online services. Members can find local meetings based on their zip code and meet up with like-minded people to receive expert assistance on planning their diet, exercise routine, and their behavior towards wellness.
Sound all right? Not too fast.
Your average Android and Apple app is doing the same for you for free. With the rise of mobile apps and wearable technology that helps track diet and fitness activity, it makes little sense for the tech-savvy to opt for a premium service when they have a free service at their disposal. Who will want to head out to a paid meeting when apps like Google Fit, My Fitness Pal, Nike + Training Club and Fitbit are delivering the same for free (or for a nominal cost)?
Furthermore, a quick look at the company’s fundamentals is enough to gauge its strength, or in this case, its weakness. Weight Watchers is highly indebted with double the amount of total liabilities than total assets, resulting in negative equity. The company has massive long-term debt compared to very low cash reserves. Compare this to its immediate competitor, NutriSystem, Inc. (NASDAQ:NTRI), that has zero debt. Yes, zilch!
Weight Watchers also has a heavy short interest with over 27% of its outstanding float short. The massive doubling in the stock price this morning will certainly have the shorts sweating.
The Bottom Line on WTW Stock
This half-a-century-old company today faces massive threats at the hands of free-service fitness applications that are quickly taking over the market. The Oprah-factor may pay in the short run, with fans and followers signing up for the services. But in the long run, the hype will settle. Weight Watchers’ target market is predominantly middle-aged females which also restricts its revenue source to a niche.
A pullback in the stock could happen sooner rather than later. I’m holding back from throwing in my money on a short-term WTW stock wager.