High-profile gym franchise F45 is in hot water again after it released its restated financial accounts, which showed that over the past two years, it had suffered losses of around US$370 million or just under $600 million Australian. It is also facing lawsuits from franchisees and celebrities who used to endorse the brand.
F45 established its first gym in Sydney in 2013 and it took the world by storm using the franchising model to establish over 1,500 studios in 63 countries worldwide by June 2021. The gym was made popular with the likes of Mark Wahlberg and other celebrities such as David Beckham, promoting its 45-minute high-intensity workout.
F45 went public on the NY Stock Exchange on July 14, 2021, with an offer price of around US$16 a share. Investors must now be scratching their heads at what went wrong, given that only two years later, F45 is on the brink of collapse. The shares were de-listed from the NYSE in September with a final listing price of just US$0.025. Anyone who invested in the initial offering has lost most of their investment with the stock down 99.84%.
Unfortunately, when a stock delists from an exchange the only way to sell your shares is to find a private buyer and sell them directly, which is unlikely to occur given what is unfolding with F45. Unless someone can jump-start the company most investors will have lost everything.
So what lessons can we learn from this?
Be very cautious when deciding to invest in any Initial Public Offering (IPO) because my research shows that within the first 12 months of listing, both in Australia and the USA, 50% of companies who list trade below their listing price. This is supported by an article from NASDAQ which states that the proportion of unprofitable companies that list on the stock exchange has been rising since 1980. Another study from NASDAQ ranging from 2010 to 2020 found that the majority of companies had a negative return of 64% within three years of listing.
It’s important to remember that an IPO document is a sales letter written by the marketing team with help from the accounting team and its goal is to get you to invest. Unfortunately, too many investors fall in love with a stock or its story, which is what happened with F45. Shockingly, investors are also tempted to buy more of the stock as the price falls, while others buy in for the first time believing the stock is cheap after it has fallen.
They justified their actions by the fact that Marky Mark and other famous people were backing it so it must be a winner.
As I always say, don’t try to catch a falling knife. In the case of F45, I think they tried to catch a chainsaw.
The key lesson is to never invest in an IPO until the stock is trading on the market for a reasonable time as you can never be sure how good a company is until the broader market shows support.
Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au