OSCR - Oscar Health: High Growth And Improving Profitability Make It A Buy

2023-06-14 23:34:33 ET

Summary

• Oscar Health has been growing exceptionally quickly, continuing to grow revenues at over 50% y/y even though it is now generating more than $1B in quarterly revenue.
• It also put a new CEO in place last quarter, a longtime executive at Aetna who also did a stint at Bridgewater (hedge fund).
• The firm's most recent quarter saw positive adjusted profitability for the first time as well as ongoing progress towards positive GAAP profits.
• It is also a company that has generated positive cash from operations in 7 of the last 10 quarters, which came in at a good margin when it did so. Since health insurance isn't a novel business model, it should be able to become profitable long-term.
• Since the company's stock is still significantly less than its IPO price, I think this juncture presents a good buying opportunity.

Overview

Oscar Health (OSCR) is a digitized health insurance provider first created in the wake of the Affordable Care Act, in Q4 2012. The company entered the market with a fairly high profile and has received buy-in from several high-profile investors over the years, including Google Capital and Fidelity .

Three months ago, the company brought in a new CEO, Mark Bertolini. Prior to stepping into this role Bertolini briefly held the co-CEO role at Bridgewater and before that was the Chairman and CEO of Aetna for 8 years. His stated goals are centered around driving profitability and consistently positive adjusted EBITDA for the firm.

This year has seen Oscar Health stock appreciate over 250% year to date. The appointment of Bertolini, first announced at the end of March , quickly drew heavy buying in the stock as well as further momentum thereafter.

Nonetheless Oscar Health stock is still down significantly from its IPO price of $36 per share. It has not been able to match the S&P’s price return throughout this period and continues to underperform it materially.

A new executive always brings about an interesting inflection point for a business as well as its stock. Certainly, this is the case for Oscar at the moment. Given the poor performance in the stock up until now, it appears that we have a turnaround story on our hands. This creates the potential for significant appreciation going forward. To that end I wanted to review Oscar’s fundamentals and see how well-positioned it is to achieve its near-term goals, determining if this stock is worth investing in at this stage.

Financials

It’s worth starting with Oscar’s most recent quarterly report to see where we stand. While Q1 2023 saw the appointment of its new CEO, he joined towards the end. As such the financial metrics from this quarter should be considered more as what he is walking in to as opposed to what he has been able to achieve in his first quarter on the job.

Last quarter saw the company reaffirm its yearly guidance and outperform its own expectations in profitability. For the first time Oscar crossed the threshold into positive adjusted EBITDA, which came in at $51M on an adjusted basis. Unfortunately, this was chalked up to as a ‘function of seasonality’ and is expected to decline throughout this calendar year. Oscar Health has not crossed the positive EBITDA threshold for good.

Importantly, our total company adjusted EBITDA of $51 million reflects overall profitability for the quarter. While this is a function of seasonality, we expect that our adjusted EBITDA results will trend downwards over the course of the year, it is still an important milestone for us. Next year, we are targeting for this metric to be profitable for the full calendar year. Sid will provide a more detailed review of our results in a few moments.

Source: OSCR Q1 2023 Earnings Call Transcript, Seeking Alpha

We can now look at the broader fundamental trendline for the firm with its most recent quarter included.

Revenue has grown robustly over the last 10 quarters, increasing to well over 1,000% of where it was at the start of this period. This company is clearly still at the early stage of its lifecycle and growing rapidly. Now generating over $1B in revenue per quarter it is continuing to grow in the very-high double digits. This is good to see and bodes well for the future.

As we already know, Oscar hasn’t been profitable. We can see that net income fluctuated over the last 10 quarters but has remained negative throughout. Last quarter’s net loss was, however, its smallest yet on a GAAP basis. Given the positive cyclical effects that were mentioned for this quarter I still think it’s too early to read into this.

Looking over to cash flows, things become a lot more interesting. Oscar Health has had plenty of quarters in which it generated positive cash from operations, a full 7 of the last 10. These numbers also look relatively good in terms of margins; last quarter’s cash operating margin came in at 28.2%. This goes to show that Oscar Health already has a working insurance business on its hands. I’ll also note that majority of this cash filters down into free cash flow as the company has had less than $10M of capital expenditures in each of these last 10 quarters.

As we would expect for an insurance company, Oscar has a fairly high-quality balance sheet. It has $4.48B in total assets against $3.55B in total liabilities, with $2.11B in cash included in the asset figure. Total debt stands at only $0.37B. I don’t see any cause for concern here at this time.

To summarize, these financials indicate that Oscar is a rapidly-growing company that generally maintains positive cash from operations while also having a quality balance sheet. That isn’t altogether too common in the market.

Of course, companies at this stage of growth also tend to have high rates of stock-based compensation and the associated dilutive effects for shareholders. As to Oscar, it appears to have crossed the threshold into a slower rate of common share issuance, with the last 5 quarters all well under 5% in terms of common shares outstanding growth. The only thing to note here is that this trend seems to be picking back up; I would keep my eye on this metric going forward.

Valuation and Risk

Oscar’s lack of profitability or overall consistency in cash metrics makes it difficult to compare it on a price/earnings or price/cash flow basis. I also don’t think it is particularly informative for us to do so for a company at this stage of its lifecycle.

I think the more salient aspect of the stock’s price here is the fact that Oscar Health stock is distinctly cheap as per its own trading history. Even as it has continued to grow rapidly and even demonstrate progress on profitability, its share prices are nowhere near where they were near the time of its IPO. The market is altogether more pessimistic on the firm even as it has grown revenues significantly while also making progress towards profitability during this time. Recent appreciation could be a reversal of this.

Since Oscar is a health insurer in particular, risks to the firm emanate from there. Oscar would see its margins compress and its outlays increase if the cost of care accelerated beyond its projections. The central metric here is of course the firm's medical loss ratio, which is expected to come in at 82-84% for this year.

While this is the case for any health insurer, it is particularly stark here as the firm is attempting to achieve yearly profitability for the first time. If it is affected by this and misses its goal of 4 quarters of positive adjusted EBITDA in 2024 it will see any momentum it may have cut short and a decline in its share price.

Conclusion

With all that being said I think this stock looks like a good buy right now. The growth picture here is exceptional and the business has had plenty of quarters in which it has generated significant cash flows already. The fact that the company already had an (adjusted) profitable quarter is also a good sign, although I am more interested in seeing GAAP profitability long-term. Of course, health insurance is already a known and proven business model. That creates far less uncertainty that this company will eventually become profitable.

When we consider all of this along with the new executive that has recently been put in place, I think the forward picture looks good for Oscar Health. I'm calling it a buy at this price.

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