DH - Definitive Healthcare: A High Growth Company On Sale

Summary

• Definitive Healthcare is now down almost 80% from its all-time high in 2021.
• The healthcare technology company has attractive products and operates in a large and growing market.
• It reported impressive growth alongside strong profitability, despite facing macro headwinds.
• The current valuation is attractive when compared to other high-growth SaaS companies.
• I rate the company as a buy.

Investment Thesis

Definitive Healthcare ( DH ) went public back in late 2021. But since its IPO, the share price has been dropping non-stop due to rising rates and a lower appetite for high-growth stocks. The company is now trading at $11.72, down nearly 80% from its all-time high. The current price seems like a good entry point for patient long-term investors.

The company operates in a resilient healthcare market that is large and continuing to grow. It is showing very strong growth despite facing a tough macro backdrop, not to mention it is already profitable on a non-GAAP basis. The valuation is also much more compelling now and seems discounted when compared to other SaaS (software as a service) peers, with similar growth rates. I believe the sell-off is overdone, and I rate Definitive Healthcare as a buy at the current price.

Why Definitive Healthcare?

For people unfamiliar with the company, Definitive Healthcare is a US-based healthcare technology company specializing in data and analytics. Through its HCI (healthcare commercial intelligence) software platform, clients are able to leverage data and gain better insights. The platform has different products with different use cases. For example, HospitalView has intelligence on all hospitals in the US, which allows users to review their financial performances or understand their current technology usage.

This is important for a lot of clients as the healthcare industry is extremely complex and fragmented, with multiple parties such as hospitals, labs, insurance companies, and more. HCI is able to save a lot of work by combining different data and come up with a comprehensive picture of the entire industry. This allows clients to better understand the situation and make better decisions. The company has a significant competitive advantage as it has data from thousands of sources. It also has sophisticated AI and ML capabilities that are hard to replicate. The company has already landed multiple blue-chip customers including Amazon ( AMZN ), AstraZeneca ( AZN ), and GE HealthCare ( GEHC ).

Robert Musslewhite, CEO, on the value of HCI :

All of this commercial intelligence helps sales and marketing teams become more efficient in determining what prospects to target, when to target them and the exact message that will be most effective. Definitive Healthcare's ability to bring this data together with a full contextual view of how best to align their sales, marketing, business development, regional expansion and M&A, make our commercial health care intelligence a must have for companies as they begin reinvesting in growth.

Market Opportunity

The global healthcare analytics market has been growing rapidly in the past few years. According to Definitive Healthcare , the TAM (total address market) back in 2017 was $14 billion and is expected to grow to $69 billion in 2025, representing a strong CAGR (compounded annual growth rate) of 22%. While the current serviceable market for the company is estimated to be $10+ billion. The current penetration rate is still really low, which leaves a lot of room for expansion.

The main growth driver in market expansion is the digital transformation of the healthcare industry. Due to the increased adoption of technologies like IoT (internet of things), telemedicine, and fintech, the amount of data available is now growing exponentially. Legacy platforms are not capable enough to keep up with this, and companies are now looking for a new platform to turn these data into insights. Therefore, customers are turning to Definitive Healthcare as they realize its platform can help them better understand data and improve their ROI (return on investment). As the market expands, customers are also likely to spend more for additional data products. I believe Definitive Healthcare should continue to benefit from strong tailwinds moving forward.

Financials and Valuation

Definitive Healthcare's latest earnings result indicates very strong demand despite facing a weakening economy. This demonstrates how "mission-critical" the company's products are. It reported revenue of $57.4 million, up 33% YoY (year over year) from $43.1 million. This is largely driven by growth in enterprise customers (customers with at least $100,000 in ARR), which increased 34% from 377 to 504. Existing customers are also spending more, and net dollar retention was 111% for the quarter.

It also showed strong profitability thanks to its mature SaaS business model. 99% of revenue comes from subscriptions and 60% of deals are multi-year, which provides long-term visibility. This resulted in the company having a superb gross margin and EBITDA margin of 88.5% and 29% respectively. It also recorded an adjusted net income of $8.9 million compared to $2.2 million, up 300% YoY. The company ended the quarter with $349.6 million in cash and only $268.1 million in debt, giving it a lot of financial flexibility moving forward.

Despite reporting such strong results, Definitive Healthcare's valuation remains very compressed. It currently has a fwd PS ratio of 4.7x, which is very low for a high-growth SaaS company. There aren't any other high-growth health tech SaaS companies in the market, therefore, I chose a few notable SaaS names for comparison. From the chart below, you can see that most peers are trading around the 8x-10x range, which represents a significant premium of 80%+. However, I don't think the huge valuation gap is justified as Definitive Healthcare demonstrated strong growth with best-in-class profitability. I believe it deserves a multiple closer to peers, which should offer solid upside potential.

Conclusion

In conclusion, I believe the risk-to-reward ratio for Definitive Healthcare at current levels is very appealing. There are certainly risks in rates continuing to rise while the appetite for risk assets remains low. But I do not think there is much more downside here onwards as a lot of pessimism should be priced by now. On the other hand, the company's fundamentals remain strong, and its addressable market continues to expand. It is also reporting impressive results and has a strong balance sheet. As mentioned above, I think we may see an upward revision in multiple which should offer upside potential. Therefore, I rate the company as a buy.

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