Mindbody Hit With Overweight At Morgan Stanley, But Cash Burn Has Risk

In a report published Tuesday, Morgan Stanley analyst Brian Essex initiated coverage of MINDBODY Inc (NASDAQ: MB) with an Overweight rating and price target of $16.50. The analyst believes that the company is well positioned to take advantage of the expected technology adoption by the Health and Wellness sector.

While the analyst also expects some near-term risk to the stock due to the company's significant cash burn and lack of profitability, MINDBODY appears well positioned to gain market share.

"As MINDBODY's primary competition is from manual processes and Excel spreadsheets, we see a substantial opportunity for strong growth ahead. We view MINDBODY as one of the best-positioned platforms to enable SMBs to run their businesses efficiently and engage with customers as they leverage the network effect of their business model," Essex stated.

At present, the company has only penetrated about 1 percent of its total addressable market, with 42,700 subscribers. MINDBODY has been growing subscribers at a 37 percent CAGR in the past three years, and the analyst expects the company to continue to grow its subscribers at a strong rate, given "lack of competition, fragmented market, and lack of penetration as many SMBs have not meaningfully adopted technology to run their businesses."

The analyst also expects the company to become cash flow positive by FY2019-FY2020. While the company's long-term story appears solid, the analyst expressed caution regarding near-term risk.

"MINDBODY has highlighted a strategy of spending to support growth, which translates into elevated losses and cash burn rates through the remainder of the year. The stock could still trade down beyond its recent sell-off since the IPO, with recent volatility continuing until better visibility into improving leverage overtakes current near term expectations of deterioration," Essex added.