September 24, 2021

GoodRx Holdings: Great Numbers, Great Business? (NASDAQ:GDRX)

GoodRx Holdings (GDRX) has seen a spectacular debut as a publicly traded company as the IPO is interesting. The company has essentially seen years of revenue growth around 50%. It furthermore has combined this growth with profitability, very strong profitability actually. This looks highly compelling as the revenue multiples look favorable given the growth and earnings compared to some other IPOs, yet I have some real concerns about the underlying strength of the business (model).

Get Healthcare, At Affordable Costs

GoodRx has a mission to help Americans get healthcare which they need at a price which they can afford. To be able to deliver on this mission, the company is building a leading consumer-focused digital healthcare platform. With many Americans strapped on savings and insurance costs on the rise (just like deductibles), this is a very dire situation for many.

Besides affordability, it is actually availability and accessibility which are major concerns as well, as all of this is taking a toll on Emergency Rooms and causing massive frustrations with healthcare workers. The other implications are even worse.

The main reason for the large inefficiency is that of the fact that there is no major platform which is widely accepted, tech-savvy and consumer-minded, while hotel rooms, cars, and airline tickets (all far smaller markets) can easily be compared. Note that the healthcare market totals $4 trillion currently!

The company started with a price comparison tool for prescriptions and over time has expanded the platform to improve health and finances by providing access to price prescription offerings and affordability solutions. Since last year, it furthermore is active in telehealth services after an acquisition in this field. The majority of the revenues are generated from a price comparison with consumers using GoodRx codes after searching for the relevant products and geographies.

The statistics around the application and company are impressive with nearly 5 million active users on a monthly basis, more than 80% repeat activity while claiming to have generated more than $20 billion in savings for consumers.

IPO Talks, Investment Thesis

GoodRx and its underwriters aimed to sell 34.6 million shares in a price range between $24 and $28 per share at the start of the month. Strong demand made sure that pricing was set at $33, up more than a quarter from the preliminary offering range. The size of the offering was held stable with 11.2 million shares offered by selling shareholders, as the company sold 23.4 million shares, thereby raising $772 million in gross offer proceeds. As a vote of confidence, pre-IPO shareholder Silver Lake is buying $100 million worth of shares in the offering!

In total, there are 384 million shares outstanding which gives the company a valuation of $12.7 billion at the offer price. The company operates with a modest net cash position, around $150 million, resulting in an operating asset valuation of around $12.5 billion.

The underlying business is quite impressive by all means. The company generated merely $99 million in sales in 2016 yet reported an operating profit of nearly $19 million! Revenues were up 58% in 2017 to $157 million with operating profits increasing sharply to $50 million. 2018 was another solid year with sales up another 58% to $250 million, as operating profits rose to $77 million. In fact, revenue growth has been quite stable with sales up 56% in 2019 to $388 million as operating earnings keep increasing (even on a relative basis) to $140 million!

While the aspiration to help consumers is great, it seems that the company certainly is benefiting from this as well! One concern which I have is that GMV of the core prescription price-saving activity was ”just” $2.5 billion. Based on this valuation of the medication, the company somehow took a cut close to 15%, very steep if you ask me!

Growth actually slowed down a bit in the first half of the year, but remained very sound nonetheless. Revenues in the first half of the year were up 48% to $256 million with operating earnings up 29% to $85 million, for margins equal to a third of sales! Slower growth is actually the result of lower monthly active user numbers, actually falling on a sequential basis due to Covid-19. Hence, second quarter revenues of $123 million were actually down about ten million on a sequential basis. So based on the first quarter results, the company is generating well over half a billion in sales and reporting operating income at a run rate of $190 million. Without interest being due and applying a 20% tax rate, the current earnings potential of $150 million translates into earnings of $0.40 per share.

At the offer price, this values the company at around 25 times sales and more than 80 times earnings. Yet with growth at around 50%, the revenue multiples are quite reasonable given other technology IPOs these days, albeit that most firms burn through a ton of cash which is certainly not the case for GoodRx.

With shares having risen to $47 on their opening day, the enterprise value has risen to $18 billion, for a 36 times sales multiple and an earnings multiple over 100 times earnings. To put this number into perspective, a financing round just two years ago valued the company at just $2.8 billion!

Some Thoughts

I am quite impressed by GoodRx, most certainly in relation to the growth and the fact that the company has been very profitable for years already! The company has essentially created a savvy way to arbitrage inefficiencies between various parts of the healthcare system.

My concern is that the underlying value add, other than price comparison and delivery, is to a great extent absent in my mind. So basically, the company relies on inefficiencies in the system and advertisement rates to drive consumers towards its platform.

Hence, the service is currently very valuable to the consumer which saves real bucks, but on a large societal basis, the function of this seems more limited and while the underlying results are simply outright impressive, I would be cautious getting too enthusiastic here. With the number of uninsured and inefficiencies in the system being key for the long-term prospects of the company, developments on this front depend of course heavily on the future political regime and their choice regarding care.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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