Nautilus Stock : Nautilus: Fit for Your Portfolio?
Nautilus Stock : Nautilus Inc. (NYSE: NLS) is an American manufacturer of fitness equipment founded in 1986 by the late Arthur Jones. In addition to the Nautilus fitness machine, they also sell Bowflex and Schwinn machines. Nautilus is headquartered in Vancouver, Washington with offices in China and Rotterdam.
Additionally, their warehouse and distribution facilities are located in Oregon and Ohio. The company has gone through six CEOs since 2003, leading to changes in product offerings during that span. At current prices, based on the lack of company growth, we would recommend an underweight on the stock.
Nautilus went public through an initial public offering in May 1999. The stock has experienced great volatility in the past 22 years, reaching an all-time high of $45.89 in the middle of 2002 and cratering to $0.45 in early 2009.
On March 20, 2020, Nautilus traded at $1.20 and began a steady uptrend peaking at $28.43 on November 6, due to the coronavirus pandemic, which benefited stay-at-home stocks. The stock again tumbled after reacting to Q3 2020 earnings and then consolidated for a couple of months, but then went through another explosive rally in late January peaking at $31.38 on February 10th.
This is the first time Nautilus surpassed the $30 mark since 2002. The latest rally was sparked by the Reddit group, WallStreetBets, an army of retail traders that target stocks that are heavily shorted. It tumbled again after reacting to Q4 2020 earnings and is currently trading at $16.39 as of Monday’s close, a 48% decline from the February 10th peak. Therefore, from a technical standpoint, the risk of holding such a volatile stock makes the potential rewards unattractive and the cost of hedging too high.
First, let’s discuss annual revenue and costs for the past five years to get a clearer idea of the company. In 2016, Nautilus reported annual revenue of $406.04 million and a cost of revenue of $194.51 million, representing an annual profit of $211.53 million. In 2017, Nautilus reported annual revenue of $406.18 million and a cost of revenue of $202.30 million, representing an annual profit of $203.88 million.
In 2018, Nautilus reported annual revenue of $396.75 million and a cost of revenue of $215.01 million, representing an annual profit of $181.74 million. In 2019, Nautilus reported annual revenue of $309.28 million and a cost of revenue of $198.70 million, representing an annual profit of $110.58 million. In 2020, Nautilus reported annual revenue of $552.56 million and a cost of revenue of $323.76 million, representing an annual profit of $228.80 million.
Annual Revenue (in millions of dollars)
Annual Profit (in millions of dollars)
Nautilus has been experiencing negative growth in both revenues and gross profits until 2020, when the work-out-from-home trend boosted demand for its main products. The person fit industry has been booming and is the home to many successful companies, yet Nautilus has failed to capitalize on its “first mover advantage.” Simply put, without the pandemic, Nautilus’s business showed no signs of improvement given the lack of demand and strategic initiatives.
So, will the pandemic be a turning point for Nautilus or just a rain of cash? There are two factors to be considered. First, will this trend be sustainable? Second, does Nautilus have the moat to protect its long-term growth? The answer is no to both questions.
First, gyms are different from coding, which our researchers can do easily with the comfort of their home. The cost of building a home gym on par with an actual gym is too daunting for most people to stop them from going out when everything reopens. Therefore, the demand for Nautilus products is not expected to grow in the future.
Second, even for those people who chose to work out at home, Nautilus cannot fend off the competitors. Given its gradual decline before the pandemic, Nautilus lacks the necessary strategy and technology to capitalize on the growth of the personal fit industry, compared to its competitors like Peloton and Planet Fitness, even though Nautilus has been around for longer.
Nautilus Stock : Fit For Your Portfolio?
Therefore, we are confident that the overall demand for Nautilus equipment will gradually normalize along with the vaccine progress, and the market share of Nautilus will be conceded to its competitors.
Predicting 2021’s revenue and profits will be calculated differently than in prior years. Last December, the Board of Directors of Nautilus approved a change that redefines their fiscal year to the period of April 1st to March 31st, instead of the usual January 1st to December 31st period. We expect revenue and profits to decrease for 2021. (Note that Nautilus is expected to report Q1 2021 revenue on May 4th) Analysts are expecting Q1 revenue to be $157.40 million and revenue for the year to be in the $610 million range, representing a 10% growth for Nautilus.
However, I believe that these revenue estimates for the year are too demanding due to the gradual reopening of gyms and will likely be revised lower later in the year to numbers in the lower $500 million range. Our estimate represents a transition to figures closer to pre-pandemic norms. Although analysts do not release estimates on profit, we believe that the annual profit will be slightly lower than 2020’s for similar reasons.
Nautilus has also cut back some of its product offerings. The Universal brand of fitness machines was discontinued in 2019. Furthermore, the Octane Fitness brand was sold to True Technologies for $25 million last October. This represents a significant discount from when they first acquired Octane in 2015 for $115 million from North Castle Partners. Unless they acquire another brand, the current offerings are not enough to justify future revenue growth.
Let’s next discuss earnings per share (EPS) for the past five years. In 2016, their EPS was $1.09. In 2017, EPS dropped to $0.85. It continued dropping in 2018 and 2019, to $0.48 and -$3.13, respectively. This drop is in line with the drop in their gross revenue and profits. In 2020, EPS bounced back to $1.86, due to strong demand from the pandemic. Analysts are expecting an EPS of $0.45 for Q1 2021 and an EPS in the neighborhood of $2.25 to $2.36.
Annual EPS Source: YCharts
Although the pandemic may have made Nautilus look like an attractive investment, there are better plays if one is truly interested in the fitness and gym space. Nautilus has too much competition such as Peloton and Planet Fitness. Additionally, the price range for Nautilus is too unpredictable, it can easily head back towards all-time lows. Nautilus is just too risky to add to one’s portfolio.
Bowflex Stock by Jay Devon