SHCR - Sharecare Guides To Lower 2023 Growth

2023-07-12 17:04:03 ET

Summary

• Sharecare, Inc. provides a range of digital health programs and content to enterprises, healthcare providers, and life science firms.
• Management has guided to only 2.7% top-line revenue growth (at the midpoint of the range) in 2023, a substantial drop from 2022's growth over 2021.
• Until revenue growth is reignited and significant progress is made lowering operating losses, I'm on Hold for Sharecare.

A Quick Take On Sharecare

Sharecare, Inc. ( SHCR ) is a software company that provides digital health and wellness solutions to enterprises and health system participants in the U.S.

Management’s lower top line revenue growth rate expectation in 2023 combined with significant operating losses and free cash burn, makes me cautious on SHCR shares for the near term.

I’m on Hold for Sharecare, Inc. stock until we see substantial operating loss reduction and reignition of meaningful revenue growth.

Sharecare Overview

Atlanta, Georgia-based Sharecare was founded in 2009 to develop a platform to connect health plans, patients, providers and employers for better health information and outcomes.

The firm is headed by founder, Chairman and CEO Jeff Arnold, who was previously the Chairman and CEO of HowStuffWorks, which was sold to Discovery Communications. He is also the founder and CEO of WebMD.

The company’s primary offerings include information portals for enterprises, employees, health plan tracking and care management solutions such as:

• Community engagement

• Benefits Hub

• Healthcare provider navigation

• Health profile

• Targeted goals and tracking

• Workplace wellness and education.

Sharecare acquires customers through its direct sales force and strategic alliances with health partners, consultants and brokers.

Sharecare’s Market

According to a 2023 market research report by Grand View Research, the global market for digital health solutions was estimated at $211 billion in 2022 and is forecast to reach $826 billion by 2030.

This represents a strong forecast CAGR (Compound Annual Growth Rate) of 18.6% from 2023 to 2030.

The main drivers for this expected growth are a growing prevalence of chronic diseases, increasing interest by consumers in accessing healthcare improvement options and higher demand by companies to provide wellness programs and technologies to their employees.

Also, the chart below shows the U.S. digital health market’s historical and projected future growth trajectory through 2030:

The chart below shows the 2022 breakdown of digital health solutions market share by technology type:

Sharecare’s Recent Financial Trends

• Total revenue by quarter has grown as follows; Operating losses by quarter have remained substantial.

• Gross profit margin by quarter has trended lower; Selling, G&A expenses as a percentage of total revenue by quarter have also trended lower in recent quarters.

• Earnings per share (Diluted) have remained substantially negative in recent quarters.

(All data in the above charts is GAAP.)

In the past 12 months, SHCR’s stock price has risen 8.39% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 30.06%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with $154.4 million in cash and equivalents and $0.2 million in long-term debt.

Over the trailing twelve months, free cash used was $64.6 million, during which capital expenditures were $3.5 million. The company paid $46.5 million in stock-based compensation ("SBC") in the last four quarters.

Valuation And Other Metrics For Sharecare

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

SHCR’s most recent Rule of 40 calculation was negative (8.2%) as of Q1 2023’s results , so the firm has performed poorly in this regard, per the table below.

(Source - Seeking Alpha.)

Commentary On Sharecare

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results, management highlighted the progress made on its operating expense savings initiatives as it pursues $30 million in annual expense run rate savings by 2024.

Subsequent to the call, the Board of Directors authorized the repurchase of $50.0 million of the company's common stock funded through existing cash and equivalents.

The firm plans to market its enterprise platform to health systems, life science companies and other healthcare organizations.

However, management didn’t disclose any company, customer or revenue retention rate metrics.

Total revenue for Q1 2023 rose 15.5% YoY, but gross profit margin decreased 7.2%.

Selling, G&A expenses as a percentage of revenue dropped 27.4% year-over-year, while operating losses were reduced by 27.5%, although losses remain very high.

Looking ahead, management guided 2023 topline revenue growth to $454.25 million at the midpoint of the range (2.68% growth over 2022) and adjusted EBITDA to be $27.5 million. Adjusted EBITDA does not include stock-based compensation, which is a significant expense for the company.

If the company achieves the 2023 annual revenue growth guidance of 2.68%, that would be a sharp drop from 2022’s growth of 7.17% over 2021.

The company's financial position is reasonably solid for the short term; however, at its current rate of free cash burn, it has only enough cash to last for 2.4 years, so management will need to reverse the cash burn in order to stay solvent.

SHCR’s Rule of 40 performance has been poor, with low revenue growth combined with negative EBITDA.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Macro" two times.

Regarding valuation, in the past twelve months, the firm's EV/Sales valuation multiple has risen a net of 28%, as the chart from Seeking Alpha shows below.

The primary business risk to the company’s outlook is slowing business growth due to macroeconomic factors, including lower digital spending by pharmaceutical companies.

Management’s lower topline revenue growth rate expectation combined with significant operating losses and free cash burn makes me cautious on SHCR for the near term.

I’m on Hold for Sharecare, Inc. stock until we see substantial operating loss reduction and a reignition of revenue growth.

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