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Why Mindbody Should Be on Your Radar

The tech industry is so chock-full of small-cap stocks with huge potential -- and huge risk -- that it can be hard to know where to start looking. Luckily for you, we've done the research and found a small-cap company with a solid business model and huge potential for growth -- Mindbody (NASDAQ: MB).

In this clip from Industry Focus, tech writer Rick Munarriz explains what Mindbody does, and shares why he thinks it makes for a great long-term investment. Click play to find out how Mindbody could grow in a huge way in the long term, the most important risks investors need to know about the company, and more.

A full transcript follows the video.

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This video was recorded on Oct. 20, 2017.

Rick Munarriz: Hi, I'm Rick Munarriz, TMFBreakerRick, and I want to talk about Mindbody, ticker symbol MB. This is one of the smaller tech companies in the tech universe. It's about a $1.3 billion company. Mindbody has a pretty unique product in that they run this app, this software, a cloud-based platform, for a lot of the wellness industry. I'm talking about not just medical, but yoga studios, beauty salons, Pilates classes. All these small independent players out there sign up with Mindbody, and then Mindbody delivers leads.

And it does so by making the reservation process transparent. A lot of times, when my wife needs to get her hair done, she'll call up a hair care salon and say, "I want Monica to cut my hair," and it becomes this whole hassle. Mindbody has gotten rid of all that. It's a place where, through the app or online, you actually have access to any area, any participating person that's around there, and you can just pick. And it's transparent, the availability, what they can do, their services.

What's cool about Mindbody, they have nearly 60,000 companies that have signed up for Mindbody. This is a company that, even though they're small, and they're still not profitable, they should be profitable by next year, they grew the revenue at 31% in the second quarter. In the third quarter that ended back in September, their guidance was for revenue to grow 29% to 31%. So this is a company that's actually growing at a very healthy rate compared to a lot of these other specialty companies.

With Mindbody, what's cool is, they collect money two ways. First of all, there's a subscription revenue to be a part of it, and services for the leads they deliver, sort of like an OpenTable in the restaurant world before it got acquired by Priceline. You have a case with Mindbody where they also make a little money on the payments side, which is actually a faster-growing part of the business, but still about a third of the revenue.

Mindbody is actually collecting money when they're helping process payments. These small companies, they turn to a company they trust. And they trust Mindbody to deliver leads. And we're seeing revenue per subscriber, revenue per customer go up high. It's up about some 20% over the past year. You have a case where companies trust these platforms. And there's a whole networking effect. If you go somewhere, and you say, "I trust Mindbody; I'm going to fire up the Mindbody app because they really did a good job on getting this massage I needed" -- and you're saying, "I think I would like to check out this yoga studio, and it's right there, it's on the Mindbody thing." So being part of the Mindbody family opens you up to other possibilities.

The company, again, it's not profitable yet. Some analysts think it will turn profitable by next year. The others think by 2019, but it's definitely coming. But right now, the growth is spectacular. And even though this is a $1.3 billion company, I don't expect this to be the next huge $100 billion market cap company. All it has to do is double or triple in the next five years or so for you to make out pretty well. And companies like this that are category leaders in this very thin fragment really do pretty well on their own, or, if not, they get bought out by a bigger company.

Either way, I think Mindbody's future is bright, and the stock has done really well over the last few years, and I think it'll continue to do so. So that's Mindbody, ticker symbol MB. Namaste!

Dylan Lewis: Is that not the most Rick way to cap something off?

Sarah Priestley: Yeah, it was great.

Lewis: [laughs] I'm glad that Rick pitched Mindbody, because we got two megacap companies with Netflix and IBM, so it's kind of nice to give our listeners something that's maybe a little bit less covered. This was actually a space where Rick spends a lot of his time covering for some of our premium services. So, nice for him to bring some of that into our discussion here today.

Rick mentioned it in his pitch, but it bears repeating: Mindbody is a small-cap company, so the growth runway is significantly longer for them. But it's also a little bit riskier. As someone starts to grow and really get a meaningful chunk of the business, and starts making some money off of a very pretty particular segment, other people tend to perk up and notice that there's a big opportunity there, and competition might swoop in.

But they're kind of a niche player, which he talked about. They're this software-as-a-service company. And because of that, you look at their financials, and while they don't pull in a ton on the top line right now, about $160 million over the past 12 months, they command pretty high margins. They grossed $112 million on that $160 million over the past 12 months. So, typical software business here, where it's very scalable, and the margins are great.

What do you think about this fitness and wellness market in general, Sarah?

Priestley: We were joking yesterday about millennials as part of our Halloween costume for our team, and I think it really plays into this whole generational move. Millennials like boutique fitness classes, apparently, more than we like gyms, and we're willing to spend a bit more on that. So it's this secular transition that the company is tapping into. I think boutique studios now make up 42% of the health-club market, and that's a $24 billion market, so there's a huge opportunity here. Whether it stays around remains to be seen.

But right now, I do agree, there's definitely an opportunity. I think people who go to boutique classes spend about 1.9% of their income on those, whereas people before who were just attending a standard gym, it was under 1%.

Lewis: It's kind of this lifestyle brand thing. In some ways, a lot of these classes are a place to be seen, or a place to go with your friends. I'm not a part of this. I work out alone in the basement of Fool HQ's gyms. So I don't know, but I get the sense, at least, you're talking about barre classes or yoga classes, it's as much a social thing as it is why you're there for wellness.

Priestley: Vince and I on the Consumer Goods show on Tuesday, we've talked about this before. There's a whole shift, as you said, toward lifestyle fitness. A lot of that is showing in the athleisure industry, and everything else is having ripple effects. And a lot of analyst concerns across this broad spectrum is just, how long it's here to stay. I do think, honestly, it's a change that will remain for a while, at least.

And obviously, Mindbody is really making the most of it right now. Subscription and services grew 29%, payments revenue up 37%, they're clocking incredible growth, they're growing their number of subscribers. Importantly, they're growing the high-value subscribers, which is a key metric to look at if you're considering this company.

Lewis: We talked about the trend here, generally. Something that I I look at this space, and I don't think people are going to get less healthy. It's possible. Unless we invent the pill that makes it where we don't need to work out at all. That'd be great. That would be a beautiful thing. But, I do think wellness has become so much a part of the modern consciousness in a lot of ways that I don't really think it's going anywhere.

Something that I do like about what they do, as opposed to investing in a pure-play fitness company like a SoulCycle or something like that, it doesn't really matter what the hot workout style type thing is, whether it's barre or spin classes, whatever. They can provide for that market. Mixed martial arts, they can do that, too. So it's a little bit less tied to the specific flavor of the week within wellness, and more people are going more to boutique fitness classes, and this is a company that helps those types of businesses organize everything and get it done. They support a whole bunch of different things. Like I said, yoga, they do personal training, wellness, boxing. Basically, if you can book it. They also do hair cutting, apparently.

Priestley: Oh, really?

Lewis: So it's a little bit all over the place. There are some growth opportunities for them into other segments. In terms of the suite of stuff that they offer, online scheduling, marketing, point of sale, client management software, staff resources. They're kind of building out their functionality and what they offer to these businesses. And I've talked about this Monday's show with Michael that I did, the more and more you can build out your offering if you're a business provider to the point that you become a one-stop shop, the more compelling you become to customers. And it seems like they're doing that.

Priestley: Yeah, absolutely. And you said it, these software companies, if you look at Square, Shopify, they create a platform that's very easy for small to medium-sized businesses, which is a huge market, and probably a hugely underserved market, and they really capitalize on that. As you said, they offer a ton of things. You can create your own design in their app interface, so you continue that brand all the way through in the customer experience. As you said, they're brand agnostic, gender agnostic, too, because a lot of these fitness places tend to skew to women. But as you said, fitness, martial arts, all those kinds of things that men are picking up a bit more.

Lewis: Something I was surprised with Mindbody was, hearing the pitch, I was like, how big is this market really? They currently serve about 60,000 businesses. Management estimates that the total market size is about 4 million businesses. So their penetration is super low in the addressable market that they see. Obviously, they won't realize all of that. But, that is to say, there's a big, big opportunity out there.

I know, recently, there's been some focus on their number of business subscribers, basically. Look at their users. The company has focused on basically their higher-value businesses, working away from their low value and spending a little more time with folks who are making use of more of their functionality and bringing in more money for them. I think, obviously, short-term hit to numbers like the businesses that you support. But longer term, it might be a really good move for the business, because they're not spending a ton of time on low-performing businesses that really aren't doing that much for them.

Priestley: And average revenue per customer is $244 a month, which is pretty high, when you think about it. And I think, as they transition to these more, 13% growth in high value subscribers is what they achieved last quarter, compared to 6% subscriber growth overall. So they're obviously tapped into this market much more.

Lewis: The thing you worry about with this, and I've seen some other software providers run into this trap sometimes, is you provide this service to a business and you grow with this business, and then the businesses grow to the point where they decide to build out their own infrastructure for those things. This very famously happened with Twilio, the app-developing business that provided a lot of the communication software for Uber. Uber was one of their big clients, and at a certain point, Uber said, "I think we're going to handle this on our own. I don't think we need you guys to do this anymore." So they lost a very big book of business because of that.

So the pro is, these types of businesses scale with the companies that they support and they enjoy the same successes. It's a symbiotic relationship. The con is, if they get really big, if they go from being a local chain with a couple of locations to a national chain, they may decide, we're going to handle all the software stuff on our own.

Priestley: Yeah. The con to your con, if you like, is that if you look at Shopify, a lot of the companies they have that have grown into, not huge companies, but good, medium-sized companies with a lot of cash flow, have remained with them because their platform is so sticky. Square, again, is exactly the same. They're growing their medium-sized businesses with a lot of revenue growth. And I think of the 60,000 that they have, if you consider that maybe 5% become these huge national chains and leave the platform, that's still a huge groundswell that you can maximize.

Lewis: Yeah, it's not a huge, massive risk, but just one that I wanted to highlight.

Priestley: OK, sorry. [laughs]

Lewis: But I think the con to your con was a good walk back on my fearmongering. I didn't mean to strike fear into Mindbody shareholders.

Dylan Lewis has no position in any of the stocks mentioned. Rick Munarriz owns shares of Netflix. Sarah Priestley owns shares of Square. The Motley Fool owns shares of and recommends Netflix, Priceline Group, and Shopify. The Motley Fool owns shares of Square. The Motley Fool recommends Mindbody and Twilio. The Motley Fool has a disclosure policy.