GoodRx Is Overvalued Without A Path To Double-Digit Growth (NASDAQ:GDRX)

GoodRx Holdings, Inc. (NASDAQ:GDRX) operates within the healthcare trade, particularly specializing in making prescription medicines extra inexpensive for shoppers. Their enterprise mannequin revolves round aggregating present drug costs from 1000’s of pharmacies throughout the USA and presenting these costs to shoppers through their platform. As well as, they provide coupons that can be utilized at pharmacies to buy medicine at a reduced fee.

GoodRx generates income by charging a small payment to the pharmacy every time a shopper makes use of a GoodRx coupon to fill a prescription. In addition they supply a subscription service known as GoodRx Gold, which offers even deeper medicine reductions for a month-to-month payment. Lately, they’ve expanded into telehealth companies and different areas of healthcare, diversifying their income streams.

GoodRx has had a risky 12 months, rising on Q2 earnings, falling on Q3 earnings, and rising once more on insider transactions, growing by 19% on the finish of the day.

GoodRx is going through headwinds throughout almost each a part of the enterprise, value development is outpacing income (development plans would additional improve value), and DCF on administration steering yields a value goal of $4.50, 25% draw back to right this moment’s pricing. In reality, a tough estimate exhibits the enterprise would wish to develop 10% whereas controlling prices to justify its present value. With that mentioned, I consider GoodRx is overvalued and fee the inventory a promote.

Dealing with Headwinds Throughout The Enterprise

Every of GoodRx’s three core companies are fighting development. Beginning with the biggest enterprise, Prescription Transactions, the enterprise grew 3% in Q3 however noticed pricing decreases offset by shopper development. With pricing impacting the complete base, decrease shopper development in future quarters may imply a decline within the enterprise. I might additionally count on pricing challenges to proceed as healthcare firms work to push down rates. Remember the fact that the enterprise declined sequentially each quarter in 2022 and is down 13% from the start of 2022

The subsequent enterprise, Pharma Producer Options, was down 35% pushed by a contract termination. Whereas administration has centered on the termination in earnings discussions, the enterprise nonetheless would have been simply higher than flat year-over-year.

Lastly, the subscription enterprise is in lively decline dropping 12% versus prior 12 months pushed by the tip of the Kroger Financial savings Membership partnership. Whereas administration notes development of their direct-to-consumer Gold plans, they didn’t present statistics on traits of the enterprise.

Extra critically, your complete enterprise mannequin is below menace from Mark Cuban’s Price Plus, CVS Well being Company (CVS) and Amazon.com, Inc. (AMZN), and to a lesser diploma, Walgreens Boots Alliance, Inc. (WBA). Price Plus, CVS and Amazon are shifting to a fixed-price prescription mannequin primarily based on what they paid for the drug plus a nominal markup. This brings extra transparency for shoppers, but in addition undermines GoodRx’s largest enterprise which was value transparency and decrease prescription prices, usually beneath negotiated insurance coverage pricing. It’s too early to inform the monetary affect, however I battle to consider shoppers would add the additional step of GoodRx once they can get the identical value simply strolling into the pharmacy.

Price Development Outpacing Income

Along with the struggles with development, GoodRx’s prices are outpacing income. Q3 was a little bit of a large number on account of restructuring, however even after accounting for restructuring prices as a % of income have been up 2ppt. Within the earnings name, administration talked about restructuring would begin to profit the fee base in This autumn, however earnings steering does not imply a lot in the best way of change.

2024 steering from the earnings name suggests steady EBITDA margin, so once more I’m not seeing a margin profit from value.

Strategically, administration has dedicated to aligning assets behind development. As we take into consideration the close to time period, development usually places downward strain on margin. I really feel the corporate wants a a lot stronger concentrate on value containment to negate the dangers to income.

DCF Exhibits Draw back On Administration Steering

I ran three DCF fashions to indicate development on administration steering, no development, and what development would justify the present value. Assumptions inherent in all three fashions:

• No important modifications to value base apart from scaling with income.
• 12% low cost fee on account of larger threat premium for a gradual development firm and aggressive threat.
• 5% inflation primarily based on the healthcare trade.

For the primary mannequin, I seemed on the midpoint of administration steering. Particular steering was supplied for 2023 and for 2024 administration guided to extrapolate This autumn 2023. This is able to be 2-5% income development and flat EBITDA.

This mannequin yields a value goal of $4.50, 25% draw back from right this moment’s pricing.

For the second mannequin, I assumed no development in both income or value by way of terminal worth. This isn’t straight life like however is finished to indicate flat margins with out noise for functions of an instance.

This mannequin yields a theoretical value goal of $2.80 on the present run fee of the enterprise.

For the ultimate mannequin, I plugged income development to get a price of $6 per share, held variable value %, and glued prices at inflation. This represents the theoretical development fee wanted to help the present pricing.

This mannequin required a ten% development fee to yield a $6 value.

Upside Potential

The built-in financial savings program is the perfect shot for development. This program helps align corporate-funded insurance coverage extra carefully with GoodRx. As administration famous:

It is easy and chic. The worker presents their employer-provided profit card and pays the decrease of their funded profit value for a prescription or the GoodRx value, as is usually the case.

GoodRx has partnered with pharmacy profit managers, protecting greater than 60% of US shoppers. Presently, this can be a small plan not driving important income; nonetheless, with the doable market publicity, that is the perfect guess for development in addition to heading off the pricing transparency dangers from main pharmacies.

Verdict

On the income aspect, GoodRx is going through headwinds throughout the enterprise along with having the enterprise mannequin undercut by main pharmacy chains. On the expense aspect, margins are contracting, and a major restructuring would not considerably change steering on profitability.

DCF evaluation offers a value goal of $4.50 primarily based off of administration steering within the 2-5% development vary. Justifying the present share value close to $6 requires 10% development, greater than double the steering. The shining gentle for development appears to be the built-in financial savings program, which aligns GoodRx extra carefully with corporate-funded insurance coverage, offering a big market alternative. But, it’s at present a small plan that’s not producing substantial income.

With these factors in thoughts, I consider GoodRx is a promote, not less than till there’s extra readability on important development trajectories and mitigation of pricing transparency dangers.

This text represents my private opinion and doesn’t represent monetary, authorized, or tax recommendation. Please seek the advice of a licensed advisor prior to creating funding selections.