Mindbody (tkr: MB) is a cloud-based, software-as-a- service (SaaS) business management software and payments platform that caters to wellness businesses, including fitness and yoga studios, spas, and salons. Its customers include local wellness businesses, national wellness chains and international franchises. Mindbody software enables its customers to easily manage class and appointment schedules, staff members, client information, online bookings, inventory, payroll and retail sales. Mindbody has around 60,000 subscribers out of roughly 4.2 million wellness businesses globally.

With only about 1% penetration, Mindbody has an opportunity to capture a larger market share in a growing global market. Mindbody’s vertical integration gives it a deep level of knowledge in the wellness industry space. The company estimates that over 90% of the addressable market currently uses on-premise, basic, non-tailored solutions such as notebooks, Microsoft Excel, or Microsoft Word documents. Mindbody has begun to benefit from the network effect of its growing subscriber base, attracting new partners like Google and Fitbit. Mindbody had its IPO in mid-2015, and although the company is not yet profitable, the CEO has predicted that they will be by the end of 2017, and earnings trends indicate that this should be an achievable goal. On a price-to-sales valuation basis, Mindbody is relatively inexpensive at about 7x sales, especially considering that many comparable SaaS companies trade closer to the 10-12x range.

We recently initiated a position in Mindbody in order to gain exposure to the growing trend of people attending studio, spin and barre fitness classes in addition to or instead of simply having a monthly gym membership. Importantly, Mindbody is not tied to the success of any particular fitness fad, but rather benefits from a more broad expansion of “boutique fitness.”

Mindbody has focused on increasing its average revenue per subscriber through cross-selling and offering more integrated features and services to high-value customers. The company made the decision at the beginning of this year to stop selling its “Solo” subscription to individual practitioners, and instead focus on higher-value subscribers. This caused the number of subscribers to dip slightly relative to the previous quarter, which led to a negative reaction in the stock. We took that stock dip as a buying opportunity, because we believe that Mindbody is employing the correct strategy for long-term revenue and margin growth.

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