Down 37% From Its All-Time High, Is This Growth Stock a Once-in-a-Generation Investment Opportunity?

Due to the temporary closures of gyms and other public spaces enacted to slow the spread of COVID-19, Planet Fitness (PLNT 0.05%) took a big financial hit during the early stages of the pandemic. But shares eventually recovered before hitting a new peak in November 2021.

It’s been a difficult ride for shareholders in this profitable and scalable business since then, though. As of April 16, this fitness growth stock is down 37% from that all-time high. Could that make Planet Fitness a once-in-a-generation investment opportunity?

Looking at the fundamentals

Planet Fitness had a strong 2023. It grew its revenue by 14.4% to $1.1 billion, a new record for the company. This was driven by an 8.7% growth in same-store sales, as well as the opening of 165 net new locations. Planet Fitness also added 1.7 million new members, bringing its total customer count to 18.7 million as of year’s end.

All of these key metrics point to a business that has bounced back nicely from the depths of the coronavirus pandemic. Consumer behavior has normalized, which has been a clear benefit. Its executives remain optimistic about the long term. They think the company can one day have 5,000 gyms open in the U.S. That would be a near doubling of its current footprint. And if Planet Fitness gets remotely close to that target, its sales and earnings should be significantly higher than they are today.

Understanding competitive advantages

It’s extremely difficult to find lasting success in the fitness industry, which has a long history of short-lived fads. It doesn’t help that these companies must bank on their customers sticking to their workout routines — or at least paying the fees that would allow them to.

Planet Fitness has figured out how to build a sustainable business model. Part of its success comes from operating a franchise system. Of the company’s 2,575 locations, less than 10% are actually owned by Planet Fitness. The rest are owned by private investors who put up their own capital and pay recurring fees to the business.

“The best business is a royalty on the growth of others,” famous investor Warren Buffett once said. Planet Fitness fits that description. It expands on the backs of the capital investments that franchisees make. This helps drive the continued generation of free cash flow, of which Planet Fitness reported almost $200 million last year.

The company’s scale and brand are also important competitive strengths. Planet Fitness has a national reach that makes it easier to attract new members. It has the financial resources to acquire favorable locations to open new gyms. And it can spend more on marketing, all while keeping its lowest-priced membership tier at just $10 per month. That’s hard to beat.

A worthy investment candidate

Planet Fitness possesses attributes that make it a quality business, particularly in the fitness industry. It’s growing customers, revenue, and profit, and appears to have a long runway for growth ahead.

To buy the stock, investors are being asked by the market to pay a forward P/E ratio of 24.4. That represents a premium to the 21.3 multiple of the S&P 500. But some investors might believe that the valuation is justified.

To be clear, I do think that Planet Fitness makes for a worthy investment candidate today for long-term investors. But I don’t believe we can call it a once-in-a-generation opportunity. If its forward P/E ratio dropped substantially to say, 15, then maybe it would fit into that rare category. At that point, it would look like a no-brainer stock to buy.

Nonetheless, investors should still take a closer look at the stock for their own portfolios.