This Growth Stock Is Up 42% in the Past Year. Should You Buy It With $1,000 Right Now?
In the last year, the S&P 500 has climbed 17%. That's a better-than-average gain, historically. But some businesses have fared much better, and investors should take notice of them. In particular, one consumer-facing company has well outperformed the broader index: Its shares have soared by 42% just in the past 12 months (as of Feb. 25). Should you buy this growth stock with $1,000 right now, which would give you about 11 shares at the current price?
On solid footing
The growth stock in question is Planet Fitness (NYSE: PLNT). Healthy financial results for the gym chain in recent quarters have propelled shares higher, but they're now down 17% from their late January peak, as investors apparently weren't pleased with the company's guidance in its latest report, which it released Tuesday.
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For the fourth quarter, the business reported $340.5 million in revenue. That was up 19.4% year over year, showing how Planet Fitness has successfully bounced back from the early phases of the pandemic, when all of its locations were temporarily closed. That top-line gain was fueled by the opening of 86 net new locations. Same-store sales increased by 5.5%.
"We continue to make meaningful progress executing our strategic imperatives of redefining our brand, enhancing member experience, refining our product and optimizing our format, and accelerating club openings," CEO Colleen Keating said in the earnings press release.
Planet Fitness has lots of growth potential. Management believes that it could eventually grow its U.S. footprint to 5,000 fitness centers -- nearly twice as many as its current count of 2,722.
The total addressable market domestically appears to be quite large. Only 7% of people over 14 years old in the U.S. are currently Planet Fitness members.
The company's extremely cheap monthly fees ($15 for the lowest-price option) lower the barrier to entry for people who are even slightly interested in improving their health. This puts Planet Fitness in a favorable position to benefit from a heightened interest in wellness.
Running a franchise model
As mentioned, Planet Fitness currently has more than 2,700 locations in its entire system. This makes it one of the largest gym chains in the U.S.
But only 10% of those locations are company-owned. The remaining 90% are owned by franchise partners, who put up the capital and take on the financial risk when opening a new Planet Fitness. They pay royalty fees and contribute to a national marketing fund. In return, the company provides operational guidance and marketing support.
A franchise model can be lucrative for the parent company. Planet Fitness' asset-light setup basically allows it to grow its revenues without taking on huge capital expenditures. In theory, the revenues it brings in from franchisees should be very high margin.
The company's long-term profitability levels prove that the model is working as intended. Planet Fitness registered an average operating margin of 26.9% in the past decade. The hope is that, over time, its bottom line will expand at a faster clip than its revenue.
Valuation concerns
Based on its growth prospects, profits, and franchise model, you might think that it's a good idea to add Planet Fitness stock to your portfolio. If the company can execute on its expansion strategy, its earnings could be much higher five years from now than they are today.
However, shares now trade at a forward price-to-earnings ratio of 31.4, which is not cheap. If investors want exposure to a strong player in the fitness industry, though, and intend to hold the shares for the long term, then the valuation at which they buy them might not matter as much.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Planet Fitness. The Motley Fool has a disclosure policy.