Nautilus (NYSE:NLS) Long-Term Potential (And Value) Make It A Buy

Nautilus Is Still An Overlooked Stay-At-Home Stock

I've had my eye on Nautilus, Inc (NYSE:NLS) for some time. The stock came up on my radar early in the pandemic as a winner in fitness from stay-at-home trends and its performance in the time since can only be described as phenomenal. When the company reported Q1 results, strong demand across all segments and product lines sparked a major rally. The company raised its guidance for the 2nd quarter and still, the business was so hot it beat consensus and shares popped again. Now the stock is up more than 600% for the year and trading at a two-year high and guess what? A new analyst upgrade has the market poised to break out and extend the gains even further.

Sell-side analyst Sharon Zackfia of William-Blair initiated coverage on Nautilus with an Outperform rating. Zackfia says the company’s momentum and profit-potential are in the early stages of a major, long-term transformation. In the note, she points out that “While the pivot to connected fitness creates high-margin, recurring revenue, it also provides real-time data and insights into consumer workout preferences/usage patterns that should help improve Nautilus’s product design and increase functionality in the future,”

I’d like to point out that the very metrics Zackfia takes note of are the same kind that drives sales of products in all categories and across all verticals. Connected fitness is a virtually untapped gold mine of opportunity, pun intended. I know Mark Zuckerberg would love to get his hands on that data.

The 2nd Quarter Results Are Good

To say that Nautilus 2nd performance was strong is an understatement. The company raised its own guidance after the first quarter to $94 million, that's YOY growth in the high single-digits, but even that was too low. The $114.2 million reported is more than 21% above the company’s own guidance and drove a substantial improvement in bottom-line results. The company’s net loss fell to only -$0.17 from -$2.66 in the previous year and has the company on track for profitability this year.

"We anticipate the company will generate positive free cash flow in 2020 and beyond given its asset-light model using third-party manufacturers," continued Zackfia.

Although the company is not expecting COVID-related trends to linger I’m not buying it. The latest data from Cowen shows consumer confidence in the safety of gyms, hotels, etc is on the rise it is far below the 2019 levels. At the same time, retail spending remains strong and points to solid gains for consumer stocks through the end of the year at least.

"We believe that a component of the COVID effect on our business is undeniably temporary, as gyms open and their capacity increases over the next 12 to 18 months, demand for our products will likely decline from the current elevated levels," said CEO Jim Barr during the 2Q conference call.

Based on the consensus figures, this stock offers significant value. Nautilus is only trading about 15 next year’s earnings compared to 37X for Planet Fitness, which is odd, Planet Fitness (NYSE:PLNT) is heavily exposed to the pandemic and not in a good way. Looking at names like Lululemon (NASDAQ:LULU) (66X forward earnings) and Nike (NYSE:NKE) (45X forward earnings) Nautilus is an even better value for investors looking to gain exposure to fitness trends. Now, relative to Peleton Interactive (NASDAQ:PTON) which is yet to show a profit, the company offers deep value.

The Technical Outlook: Nautilus Hot Rally Getting Hotter

I’ve seen some impressive price charts in the months since the correction but this one takes the prize as the most pandemically resilient stock in the market. Price action hit a bottom and bounced so hard it is up more than 600% in under six months. And the rally isn’t over. The 2nd quarter earnings sparked a rally that today’s news is helping to confirm. The retest of support at the short-term moving average is incredibly bullish and supported by the indicators so I have no doubt resistance will fall. In the near-term, investors might see price action advance another $2 to $4 dollars. In the long-term, I think Nautilus will double today’s prices at least.