Down 70% Since 2021, Can A Revival In Subscriber Growth Help WW International Stock Recover?

WW International stock (NASDAQ:WW) currently trades at $7.30 per share, 82% below its pre-inflation shock high of $41, seen in December 2021, and has the potential for meaningful gains. WW saw its stock trading at $6.40 in late June 2022, just before the Fed started increasing interest rates, and is now 14% above those levels, underperforming the broader markets, considering that the S&P 500 rose almost 21% over this period. WW International stock’s decline from highs seen over the Covid-19 pandemic can be attributed to the company’s lower subscriber base, particularly in the digital business, as demand post-pandemic cooled. Moreover, WW is also facing rising competition from a wave of new-age applications as well as social media influencers.

Looking at a slightly longer term, WW stock has suffered a sharp decline of 70% from levels of $25 in early January 2021 to around $7 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the decrease in WW stock has been far from consistent. Returns for the stock were -34% in 2021, -76% in 2022, and 89% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 20% in 2023 (YTD) – indicating that WW underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WW face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that WW International stock will have to gain more than 5x from here. However, we do not believe that will materialize anytime soon and estimate WW International valuation to be around $10 per share, implying about 38% gains. Over the most recent quarter, WW saw its subscriber figures grow year over year as the Digital business turned the corner. Moreover, the company is likely to benefit from its acquisition of digital health company Sequence, which offers a subscription service for telehealth consultation with doctors who can prescribe appetite-suppressing drugs such as Ozempic. However, there are risks from an uncertain economy and slowing consumer spending. Moreover, WW’s relatively high debt load (net debt of about $1.3 billion) also remains a factor potentially limiting its upside. Our detailed analysis of WW International upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how WW stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

WW and S&P 500 Performance During 2007-08 Crisis

WW International stock declined from $57 in September 2007 (pre-crisis peak) to around $18 in March 2009 (as the markets bottomed out), implying the stock lost roughly 68% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $29 in early 2010, rising nearly 61% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

WW International Fundamentals Over Recent Years

WW International’s revenues have declined steadily from around $1.4 billion in 2019 to about $1.2 billion in 2021, as the company saw its physical centers impacted by the Covid-19 pandemic, although this was partly offset by growth in the digital business. However, the digital business has seen headwinds of late, with the company’s total revenue declining to just around $1 billion over 2022. WW also swung from earning about $1.78 per share in 2019 to posting a net loss of over $3.50 per share in 2022, due to a slowdown in demand.

Does WW Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

WW total debt has remained roughly flat at levels of around $1.4 billion over the last four years. The company brought in $75 million in cash flows from operations in 2022, with its total cash position standing at about $107 million as of the most recent quarter. This could imply that the company’s financial position could be somewhat constrained in a higher interest rate environment.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe WW stock has the potential for some gains once fears of a potential recession are allayed. The company’s foray into medical weight loss solutions could also give the stock some upside. That said, the company’s high debt load as well as its declining subscriber base do present challenges.

[1] Month-to-date and year-to-date as of 12/3/2023
[2] Cumulative total returns since the end of 2016

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