SHCR - Sharecare's Growth Is Slowing As Investor Makes A Tepid Move To Acquire

2023-10-11 15:54:34 ET

Summary

• Sharecare, Inc. provides digital health and wellness solutions to enterprises and health system participants in the U.S.
• The company has received a preliminary non-binding proposal to be acquired, but shareholders appear to not be optimistic about the deal.
• Sharecare's financial trends show slowing growth, continued operating losses and negative earnings per share.
• I remain Neutral [Hold] on Sharecare, Inc. stock.

A Quick Take On Sharecare

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

I previously wrote about Sharecare with a Neutral Hold outlook.

Management’s reduced revenue growth rate expectation in 2023, coupled with material operating losses and continued free cash burn, makes me cautious on SHCR for the near term.

The company has recently received a preliminary non-binding proposal to be acquired at between $1.35 and $1.80 per share, but it appears investors are not optimistic about the deal.

I remain Neutral [Hold] on Sharecare at this time.

Sharecare Overview And Market

Georgia-based Sharecare was founded to provide a platform to connect health plans, patients, providers and employers for better health information and patient outcomes.

The company is led by founder, Chairman and CEO Jeff Arnold, who was previously the Chairman and CEO of HowStuffWorks, which was sold to Discovery Communications.

The company’s main offerings include web 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 seeks new clients through a direct sales force and alliances with health partners, consultants and brokers.

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

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

The primary reasons for this expected growth are an increasing prevalence of chronic diseases, growing interest by consumers in obtaining healthcare improvement options and higher demand by companies to provide wellness programs and technologies to their employees for healthier outcomes.

The graphic below shows the U.S. digital health market’s expected growth trajectory from 2020 through 2030:

Sharecare’s Recent Financial Trends

Total revenue by quarter has continued to grow seasonally; Operating income by quarter has remained heavily negative, with no sustained movement toward breakeven.

Gross profit margin by quarter has dropped in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have varied widely in the last two years.

Earnings per share (Diluted) have remained negative in eight of the last nine quarters.

(All data in the above charts is GAAP.)

In the past 12 months, SHCR’s stock price has fallen 41.97% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 44.77%:

For balance sheet results, the firm ended the quarter with $144.2 million in cash and equivalents and $0.4 million in long-term debt.

Over the trailing twelve months, free cash used was ($34.7 million), during which capital expenditures were $3.7 million. The company paid $40.0 million in stock-based compensation 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.)

SHCR’s most recent unadjusted Rule of 40 calculation improved only slightly to negative (6.8%) as of Q2 2023’s results , so the firm has continued to perform poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of certain keywords in management’s most recent earnings conference call:

Analysts asked management about growth in eligible lives and EBITDA for later in the year and into 2024.

Leadership said that the firm was on track to achieve its core KPI of 12.9 million lives by the end of the year. The new lives will come online by early 2024.

The company will also see benefits from its cost optimization efforts in Q3 and Q4, as well as growth in provider and life science channels.

Commentary On Sharecare

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted that it believes the company is on track to achieve "cash flow breakeven by year-end."

I’m not sure whether that was a reference to "operating cash flow" or "free cash flow."

The company's integrated approach to healthcare management has helped to reduce overall costs for its healthcare plan clients, "for engaged members by 8%, primarily by lowering inpatient admission cost."

Management continues to invest in enhancing its use of generative AI technologies "to generate personalized health insights derived from individual longitudinal and aggregated data, delivering more tailored engaging care solutions."

Total revenue for Q2 2023 rose by 6.4% year-over-year, while gross profit margin dropped by 5.8%.

Management didn’t provide any client or revenue retention rate metrics.

Selling and G&A expenses as a percentage of revenue dropped by an impressive 9.9% YoY, but operating losses were reduced by only 4.2%, to a loss of $34.1 million for the quarter.

The company's financial position is moderate, with ample liquidity, no debt but significant free cash used in the trailing twelve-month period.

SHCR’s Rule of 40 performance has continued to be poor due to being highly unprofitable.

Looking ahead, revenue for 2023 is expected to grow at 3.4% rate over 2022.

If achieved, this would represent a sharp drop in revenue growth rate versus 2022’s growth rate of 7.2% over 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has fallen by 57%, as the chart from Seeking Alpha shows below:

Earlier today, one of the company's board members, who represents 10.4% shareholder Claritas Capital, revealed that the firm had made a preliminary non-binding proposal to acquire the company for between $1.35 and $1.80 per share.

The Sharecare board hasn’t responded to the proposal, but the stock jumped about 25% to as high as $1.20 as of press time.

It is notable that the preliminary proposal has been quietly made public only through a required 13D/A filing .

While the non-binding proposal may turn into an offer and acceptance, it is curious the market hasn’t pushed up the stock above $1.20 in response, despite the proposed transaction valuing the company between $1.35 to $1.80 per share.

It appears investors may have little confidence that a transaction will be completed, at least at this time.

Given the sharp runup in the stock and the uncertainty of the preliminary non-binding proposal, my near-term outlook for Sharecare, Inc. stock is Neutral [Hold] for risk-on investors.

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