WW International, Inc.: Bull/Bear Discussion

Publicly traded companies mentioned herein: WW International Inc (WW) 

Highlights 

On March 29, 2021, DeMatteo Research hosted a bull/bear discussion on WW International Inc (WW) and the weight management services industry. While the group expressed general optimism regarding the company’s long-term prospects, there was a range of opinions regarding the growth potential of WW’s core business in 2021 and the impact on the stock. The bearish participants highlight a weak diet season (i.e., January and February), which they view as a strong indicator for full-year growth, as well as aggressive growth targets, a weakening LTV/CAC profile, and strong competitive threats. In their opinion, this ultimately creates a dynamic where it would be difficult to meet consensus estimates and to expect multiple expansion. While the bullish investors agree that there is a degree of risk to 2021 numbers, these participants believe that there is a path to reaching or exceeding the Street’s 2021 $1.77 EPS estimate. More importantly, according to the bulls, CEO Mindy Grossman has shown the ability to make major improvements since joining the company in 2017. They are therefore more focused on a 10-year DCF valuation, which they feel better represents WW’s ongoing shift to digital, product innovation opportunities, and new business segments that can create significant value (e.g., Health Solutions).

LTV/CAC

For one of the bearish presenters, the question has been what’s the terminal value for WW’s digital business. Coming off the Q4’20 earnings call in late February, he felt that the stock would react positively given that the shift to digital should cement the LTV/CAC, improve the long-term earnings power, and drive recurring business. WW doesn’t disclose many LTV/CAC details, so investors must make some assumptions. Looking at app download data, retention curves, and management’s recent commentary, it doesn’t seem like WW’s historical 10-month average retention has expanded meaningfully. Additionally, the mix shift from studio to digital negatively impacts ARPU since the price of a digital subscription is just over half the price of the traditional studio offering. Between this negative impact to LTV and CAC increasing over time, the LTV/CAC on the digital business is at best 2x - 2.5x (vs. the full company’s 5x LTV/CAC in 2020). Based on these figures, he questions whether multiple expansion would be appropriate.