MDRX - GoodRx Stock Spikes After Receiving A Strong Dose Of Performance

2024-01-11 08:30:00 ET

Summary

• GoodRx Holdings announced preliminary financial results for Q4 2023, exceeding guidance on the top line.
• The company's financial performance in previous quarters has been disappointing, with declining revenue and profitability metrics.
• Management provided optimistic guidance for 2024, but the sustainability of growth remains uncertain due to factors such as declining subscription plans.
• Many of the issues affecting it seem to be short-term in nature, and GDRX stock is attractively priced.

GoodRx Preliminary Q4 Results

From my experience, when a company announces preliminary financial results for any given fiscal quarter, it's either because they have really positive news to share, or because they have really negative news to share. Fortunately for investors of GoodRx Holdings (GDRX), an enterprise focused on getting consumers prescriptions at a great price through their online platform, management's announcement of preliminary results covering the final quarter of the 2023 fiscal year that ended up being announced on January 10th fell into the former category. The fact that shares of the company spiked 13.3% in response to the news is all the proof that you need in order to know that investors are taking a breath of relief following this development. Despite the fact that the 2023 fiscal year in its entirety, through the third quarter at least, had shown mixed and somewhat disappointing results, the final quarter looks to be quite a bit stronger than previously anticipated. Add on top of this how cheap shares currently are, and while I do not plan to buy any of the stock at this moment, I can definitely understand why some might be bullish on this name.

Some Great News from GDRX

Times have not been particularly pleasant for shareholders of GoodRx Holdings. Since I last wrote about the firm in March of 2021, shares are down 84.6% at a time when the S&P 500 is up 26.9%. Earlier in the company's history as a publicly traded entity, there was a great deal of optimism that attractive growth would continue and that the firm would continue to cause disruption in the health care market. However, financial performance over the past couple of years now has been rather disappointing. Consider how the business performed during the 2022 fiscal year . Revenue for that time came in at $766.6 million. Although that's higher than the $745.4 million reported one year earlier, it's not exactly fantastic growth.

On the bottom line, however, the picture has been downright painful. For instance, in 2022, GoodRx Holdings reported a net loss of $32.8 million. That's worse than the $25.3 million loss reported for 2021. But that's not the only profitability metric to worsen year over year. Operating cash flow fell from $178.8 million to $146.8 million. A similar decline can be seen when adjusting for changes in working capital. That drop was from $190.6 million to $167.1 million. Even EBITDA took a hit, dropping from $229.6 million to $213.5 million.

When we fast forward to the 2023 fiscal year , the picture doesn't become really any better. Revenue actually fell year over year, declining from $582.4 million in the first nine months of 2022 to $553.6 million in the first nine months of 2023. This decrease came even as the company reported modest growth in the number of monthly active consumers. In each of the three quarters of 2023 for which data has been made available, the business reported having 6.1 million monthly active consumers. While in the first quarter of 2022, it boasted 6.4 million, in both the second quarter and the third quarter that number was 5.8 million. Despite the increase for two of the three quarters on a year over year basis, prescription transaction revenue dropped 3.4% year over year because one of the major grocery chains that the company has historically provided discounted pricing for made certain changes regarding the acceptance of discounted pricing for some of the prescription drugs from pharmacy benefit managers. This had an impact, in the short run, on the number of monthly active consumers and impacted the aforementioned prescription transaction revenue. And then outside of this, pharma manufacturer solutions revenue dropped 18.6% year over year. This was driven in large part by a $10 million contract termination payment that management made as part of its restructuring efforts to focus on higher levels of recurring revenue.

Some of the weakness for the enterprise also came from a decline in the number of subscription plans. Back in the first quarter of 2022, GoodRx Holdings had 1.20 million subscribers. That number fell to just under 1.01 million by the end of the first quarter. And by the end of the third quarter, the firm had just 930,000 active subscription plans in place. Now, those who are bullish about the company might point out that the firm's bottom line did improve year over year in the first nine months of 2023. That would be true. Instead of the $30.9 million loss reported one year earlier, management reported a profit of $17 million. Operating cash flow also improved, growing from $114.9 million to $122.4 million. But that's unfortunately where the good news ends. If we adjust for changes in working capital, we get a decline from $120.2 million to $116.7 million. Over the same window of time, EBITDA for the firm dropped slightly from $163.9 million to $160.2 million.

Given this kind of weakness, you can imagine the surprise that investors likely had when management announced financial results, on a preliminary basis, that exceeded guidance on the top line. You see, when management announced financial results for the third quarter of the 2023 fiscal year, they estimated that revenue in the final quarter of the year would be between $188 million and $194 million. That number has now been revised up to be between $195 million and $197 million. This is also comfortably above the $190.8 million that analysts anticipated for the quarter.

With the increase in guidance for the revenue side of the equation, management has also revised guidance when it came to EBITDA. Prior guidance called for an EBITDA margin in the mid to high 20% range. That number has now just been pushed up to the upper end of the aforementioned range. If we assume that this should be about 29%, then you are looking at a reading of around $56.8 million. That compares to the $52.5 million that a margin of about 27.5% would result in. By comparison, in the final quarter of 2022, the business reported EBITDA of about $49.6 million. Unfortunately, we don't have any idea of what analysts might have anticipated. But we do know that they were forecasting a loss per share of $0.06, so it's likely that the bottom line will come in higher than that.

It's also worth noting that management provided a first look into what investors should anticipate for 2024. The firm is currently anticipating revenue and adjusted revenue that should be in the mid-single digit rate range above what it was the same time one year earlier. In addition to applying for the first quarter, this also applies for 2024 in its entirety. Meanwhile, revenue and adjusted revenue should rise at the mid-single digit rate. But beyond that, we don't have any concrete numbers unfortunately. Regardless, the idea that the company is returning to growth after a difficult 2023 is encouraging.

The big question will be whether this growth is a one-time thing or permanent. We saw earlier in this article how the number of active consumers stabilized and even ticked up modestly. But subscription plans have continued to drop. Management did state that the drop that began in 2022 was the result a price increase. But since then, the number of plans has continued to decline. Management stated that this will likely continue through at least July of 2024 as marketing spending on the Kroger Savings program that it has included in these figures continues to be cut and as the program eventually comes to an end. The one-time contract hit of $10 million, plus the company's ability to adapt to the aforementioned grocery chain issue, will also play a role in determining the company's near-term picture.

Keeping all of this in mind, if we use management's guidance for the year, we can see how shares of the business are priced as shown in the chart above. You can also see how the stock is priced using data from 2022 in the aforementioned chart. And in the table below, I compared it to five similar firms. Using the price to operating cash flow approach, it ended up being cheaper than four of the five companies. And using the EV to EBITDA approach, it was cheaper than three of the four that had positive results.

Takeaway

I can appreciate the optimism that investors have. Only time will tell with the future holds. The good news is that a lot of the issues facing the company seemed to be short term in nature. On top of this, the stock does look attractively priced, both on an absolute basis and relative to similar firms. All of this, combined, leads me to rate the business a very soft 'buy' at this time. But given the company's inability so far to maintain a consistent profit and the volatility in financial performance seen over the past couple of years, not to mention the risk of disruption in this market, I rate the company this knowing that it is a fairly risky prospect.

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