Mindbody Downgraded At Morgan Stanley; Firm 'Resting Between Sets'

• MINDBODY Inc MB shares have climbed 45 percent year-to-date, rising steadily after hitting a low of $9.24 on August 4.
• Morgan Stanley’s Brian Essex downgraded the rating on the company from Overweight to Equal-weight, while raising the price target from $16.50 to $17.
• After the shares responded favorably to Mindbody’s solid quarterly results, Essex believes the risk/reward is not attractive, despite the company’s ability to leverage its unique model.

Analyst Brian Essex believes that Mindbody is poised to benefit from “growing technology adoption in the Health & Wellness space.” He added, however, that the stock has appreciated 25 percent since its coverage was initiated at Morgan Stanley, while other stocks with high cash burn rates have trended lower during the same period.

Mindbody reported its 2Q results ahead of expectations, with evidence of better leverage in its business model. The company achieved acceleration in revenue growth, margin expansion, subscriber adds and ARPS during the quarter.

Essex commented, “MINDBODY has indicated a strategy of spending to support growth, which translates into elevated losses and cash burn rates through the remainder of the year. As investors have increasingly favored stocks with cash flow support in response to greater levels of market volatility, we anticipate that near-term multiple expansion will be limited.”

While saying that the price target revision reflects recent changes in peers’ multiples, Essex added that the company would need to exhibit a “meaningful improvement” in its performance for its shares to appreciate from the current levels.

“As such, meaningful execution above expectations, accelerated progress toward profitability, and indications that MINDBODY could reach cash flow breakeven sooner than expected would drive upside to our current expectations,” the analyst wrote.