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With our judgments for key drivers, together we produce many scenarios for long-term cash flows. For example, we see a 50% chance this company will produce more than $22 billion of cash over the long-term, which it could do if it’s the One & Only alternative for its current members, One of a Few alternatives for members at 1,000 new gyms under contract with franchisees, and One of Many alternatives for other prospective members in its long-term plan. We see a 20% chance it makes more than 30 billion, which it could do by dominating its first 2 markets and being One of only a Few alternatives in the 3rd market. In the interactive chart below, drag the dot to 80% to see that case, or to anywhere else to see any of the other 99 cases whose odds are driven by our odds for their drivers informed by our research attached to those drivers. If reading a smartphone, flipping to landscape orientation will help.

We can even produce scenarios for expectations for those long-term cash flows by other investors in the future, such as in 2 years, for example. Here we see 100 scenarios for those expectations for cash balance. Those expectations in 2 years influence multiple in 2 years, and our odds for those expectations enable us to handicap odds for multiples. We see a 90% chance EBITDA multiple is above Gym Group’s and a 50% chance it is above Basic Fit’s. We see a 10% chance it’s still above 25, and we can see investor expectations for Growth, Scale & Profitability that could motivate that. On the other hand, we can see investor expectations that would motivate a multiple below Gym Groups. In the bottom panel below, hover over some multiples dots to see those expectations. By estimating odds of those stories, we can estimate odds of exit multiples, which is much more useful than just looking at a wide range in a data table with no explicit odds for either end of the range.

Our story-driven odds for investors’ outlook for Planet Fitness at various future horizons help us produce odds for its valuation at various future horizons. We see a 10% chance it is more than 2.5x today’s value in 5 years, which is an IRR of 20%. On the other hand, we see a 10% chance it is more than 40% below today’s value. If we had diversified investments like this in a portfolio, we would expect it to return the mean of about 1.5x over 5 years. These odds can help us weigh better whether and how much to invest in this company, and with what deal structure.

While we saw only 50% expected return for Planet Fitness over 5 years when we looked a month or more ago, some things have changed. Over the past month, expectations have increased for disruption by COVID-19 in the US, where Planet Fitness' members live, equity indices have dropped sharply, and Planet Fitness' market cap has dropped over 30%. As the previous post shows, we have sketched out ways that different scenarios for COVID-19 might impact Planet Fitness' actual cash flows and expectations for them. While we sought downside drivers like delayed sign ups, existing member cancellations, and lower peak gym memberships in decades to come, now the odds appear to favor owning Planet Fitness more than before. We see lower odds of losing money, and a better expected return of > 40% over 2 years and > 100% over 5 years.

After we recognized the importance of non-subscription revenue for Planet Fitness and added high odds for a substantial decline in it during the COVID-19 disruption, our 5-year expected return declined, and our odds of loss increased, but neither by very much. The bigger threat is the lower odds of permanent decline in gym memberships, and despite that and a multiple higher than peers, the upside and downside balance for this investment look pretty good at its current market cap.

As the expected length and severity of COVID-19 disruption have worsened in recent days, our upsides & downsides for the equity value of Planet Fitness have also worsened. And its share price has dropped another 55% from the price at which its CEO since 2013 spent $4M last week on his first share purchase since the 2015 IPO. Is he wrong? In addition to the usual drivers, we assessed the odds for COVID-19 disruption length, revenue impact on this company during the disruption, and permanent impact on revenue from behavior change even after disruption is over. See the chart below for our conclusions on upside vs. downside for the company’s future value, which looks very attractive now. And read the following posts to see our research and odds on those 3 COVID-19 questions. You can even change their odds yourself and explore the impact of your change on the odds for the company’s future value.

After some research into Planet Fitness’ business and COVID-19, we estimated what Planet Fitness’ current equity value of $2.1B prices in as an expected value for 3 uncertainties about COVID-19. It can reflect expectations for (i) disruption of about 320 days, (ii) a decline in revenue per member of 70% during that period, and (ii) a permanent reduction in members of ⅓ from behavior change after the disruption. Below on the left, you can see the financial expectations that result, and on the right you see our odds for different financial results that may become priced in by the end of 2021. Click some lines to see the long-term market size and competitive position expectations that could motivate these financial expectations at that time. If reading on a smartphone, flipping to landscape orientation may help. Then read the following posts to see our odds for these 3 COVID-19 uncertainties and some research supporting them.