GRPN - Babylon Holdings: A Fairy Tale Gone Bad

Summary

• Today, we put digital healthcare concern Babylon Holdings Limited in the spotlight for the first time.
• Despite impressive revenue growth, the shares of this small cap company have been pummeled in the markets.
• Can Babylon Holdings Limited stock stage a turnaround in 2023?  An investment analysis follows in the paragraphs below.

Fairy tales do not tell children the dragons exist. Children already know that dragons exist. Fairy tales tell children the dragons can be killed. ”? G.K. Chesterton.

Outside of the Internet Boom and subsequent Internet Bust at the beginning of this century, has an investment craze ever destroyed such shareholder as during the huge IPO and SPAC-driven boom that ran for approximately five quarters starting in the second half of 2020 through the end of summer last year? Fueled by easy money from the Federal Reserve and massive stimulus in response to the pandemic, a huge number of companies debuted on the market to much fanfare. Over the past year, a majority of them have imploded and left original shareholders deep in the red.

Today, we look at one of the worst offenders as far as the percentage of shareholder value destroyed since its debut on the market. An analysis of this SPAC debacle follows below.

Company Overview:

Babylon Holdings Limited ( BBLN ) is a digital healthcare company based in London. The company offers end-to-end care solution that facilities through its digital health suite, virtual care, in-person medical care, and post-care offerings as well as cloud offerings. The company's offerings/platform allow people to measure, track and act on their health data by bridging physical and digital touch points of the healthcare ecosystem. Currently, the shares trade around the $6.50 level and sport an approximate market capitalization of $210 million.

The company came public in the spring of 2021 via a SPAC called Alkuri Global Acquisition. Early this year, the company announced an acquisition of Higi SH Holdings. Higi operates a network of health kiosks in retail chains such as Publix and Kroger ( KR ), where it does BMI and other health screenings.

The purchase of the remaining part of this consumer health engagement firm extended Babylon's technology platform and digital-first healthcare solutions to Higi customers?. Higi hosted 11 million consumer sessions in FY2021. This followed Babylon's acquisition of DayToDay Health, which was a digital-first program and clinical services provider for pre/post-surgery. The company's focus continues to be on penetrating the U.S. value-based care of the VBC market.

Third Quarter Results:

On November 10th, Babylon posted third quarter numbers . The company lost 23 cents a share on a GAAP basis even as revenues rose nearly 290% year-over-year to $289 million. U.S. value-based care members grew by 171% from 3Q2021 including 285% from its Medicare segment, as this line of business welcome approximately 10,000 new members. Management boosted full year sales guidance to between $1.05 billion to $1.1 billion and reiterated that it sees the company posting a negative EBITDA of $270 million or less this fiscal year.

The net loss for the quarter grew to nearly $90 million from $66 million from the prior year period as claims expenses went from $51.3 million to $264.3 million.

Analyst Commentary & Balance Sheet:

Since third quarter results posted, BTIG reissued its Buy rating and $4 price target on the stock. Canaccord Genuity maintained its Buy rating as well but cut its price target in half to two bucks a share, noting:

due to the company's negative adjusted EBITDA profile, shares are unlikely to appreciate meaningfully until more clarity on the company's timeline to reach profitability comes into focus but Babylon did reaffirm its target to reach positive adjusted EBITDA no later than 2025 .

Both Berenberg Bank and Citigroup reiterated Hold ratings. These price targets came out before the recent stock split and I don't know if they have been adjusted correctly on TipRanks or not it should be noted.

The company ended the third quarter of 2022 with $110 million in cash and marketable securities on its balance sheet against approximately $290 million in long-term debt. In early November, the company executed a $80 million private placement to raise additional funds. Recently, the company also announced that plans to sell its Meritage Medical Network, a network of approximately 1,800 physicians providing physical care in California with over $400 million in estimated 2022 revenue. Leadership believes these two transactions " will provide sufficient capital for Babylon’s funding requirements through profitability."

Verdict:

The current analyst firm consensus has Babylon losing over $1.00 a share in FY2022 even as revenues more than triple to $1.1 billion. In FY2023, losses are projected to come down to just over $.60 a share as revenues rise to some $1.4 billion. Earnings projections have been adjusted to reflect a 1 to 25 reverse split that occurred earlier this month.

The company had a GAAP loss of eight cents a share in its first reported quarter as a public company. Despite tremendous sales growth since then, Babylon has reported significantly higher quarterly losses since. Early this summer, the company disclosed measures it is taking to reduce costs by approximately $100 million per year. It also plans to drive margin improvements.

The company's trajectory so far reminds me of that famous quip, " We lose money on every transaction, but we make it up on volume ." Maybe this is not that surprising given Alkuri Global Acquisition's CEO was the previous leader at Groupon ( GRPN ), which has been public over a decade and still is not profitable and has also destroyed immeasurable shareholder value since debuting on the public markets.

That said, the company's revenue growth is impressive, and Babylon is targeting some huge markets. However, given the company's history of destroying shareholder value and posting large losses, substantially more progress needs to be made on the journey to profitability before I would consider an investment in Babylon Holdings Limited stock.

Fairy tales since the beginning of recorded time, and perhaps earlier, have been “a means to conquer the terrors of mankind through metaphor. ”? Jack Zipes

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