Summary
- DocGo joined the Nasdaq via a SPAC merger back in December 2021.
- The company provides medical transportation and mobile health solutions.
- Revenues in Q222 were up 76% year-on-year in Q222, to $109m. Net profit was $19.2m.
- DocGo looks well positioned to exploit the "last mile" care niche, which throws up interesting possibilities for growth and management favors growth by M&A.
- There's a danger of DocGo growing too fast before the business model is proven, in my view. The company's ability to offset lost COVID test revenues in 2022 may dictate the share price direction.
Investment Thesis
DocGo ( DCGO ) is an interesting investment proposition within the mobile health services industry. The company joined the Nasdaq in November 2021 via a merger with a Special Purpose Acquisition Company ("SPAC") - a company that's formed and completes an IPO strictly with the purpose of acquiring or merging with an existing company.
DocGo's merger with Motion Acquisition Corp had an implied equity value of $1.1bn, and raised $158m of funding. The company reported revenues of $318.7m in FY21, and net income of $19.2m, for a price to earnings ratio of ~34x, a respectable score for a growing and newly-listed company.
Announcing Q222 earnings , DocGo reported a cash position of $208m and revenues of $109.5m - up 76% year-on-year - with net income of $11.8m, while management increased its FY22 revenue guidance to $425 - $435m, from $400 - $420m, with adjusted EBITDA also upgraded, to $40-$45m.
The company differentiates itself from telemedicine in a recent investor presentation , stating that "telemedicine is just talk - mobile health is hands on." That may be a relief to telemedicine investors who most likely saw their investments skyrocket in value during the lockdown period of the pandemic, when telemedicine suddenly came into its own, but have been disappointed by the "bubble" bursting almost immediately.
Patients may not be quite ready for virtual care yet, but they may be ready for "last mile" care, which is the kind that DocGo provides via its two divisions - Medical Transportation and Mobile Health.
The smaller division - accounting for ~10% of DocGo's revenues - is Medical Transportation, which involves providing hospitals with on-demand, non-emergency transportation between clinical settings, for patients requiring ambulance services. Strategic partnerships are in place with e.g. Fresenius, UC Health, and others, and DocGo manages a fleet of >300 vehicles. The addressable market is estimated by management to be ~$7 - $13bn.
The larger division is Mobile Health, which utilizes "upskilled LPN's and paramedics to facilitate episodic treatment for patients at a lower cost," and accounted for $87.3m of total revenues in Q222. Services include bedside procedures, preventative care, medicine administration and monitoring, vaccinations, bloodwork and testing. The clients are hospitals, municipalities, healthcare payers, and event managers.
DocGo has provided services in 29 US states and is licensed to operate in 37 states, with 13 more licenses in process. There are more than 4,000 clinicians affiliated with the network, and the business has grown quickly - total revenues in 2019 were only $48m.
Today, with a market cap just over $1bn, and with shares trading just about flat since their listing, priced at $10.3, after a prolonged period trading between $8 and $5, DocGo exhibits many signs of being a growth story worth backing.
The "last mile" niche - if DocGo can exploit its potential fully - offers substantial rewards, although management will have to manage its money very carefully in my view. In the rest of this post, I will analyze some key features of the company and where I believe its strengths and weaknesses lie.
The DocGo Growth Story So Far
DocGo's business - and marketing - strategy appears to be based on the "Uber-ization" of last-mile delivery, providing flexible employment that suits healthcare workers. Management sizes up its own business succinctly in a slide from its investor presentation.
Performance wise, the nine straight quarters of profitability is impressive, suggesting that DocGo's business is self sufficient at the present time.
As we can also see from this Q222 highlights slide, DocGo's growth seemed to explode in late 2021, with Q421 revenues rising from $31.2m to $121.3m during the period.
Based on revenues forecast in FY22 of $430m at the midpoint, DocGo's forward price to sales ratio is <2.5x, which is a low figure that certainly gives the impression the business may be undervalued. It ought to be noted, however, that mass COVID testing revenues in Q222 were estimated at $28m, and this figure is forecast by management to fall significantly across the remainder of the year.
DocGo says it plans to add 600-plus full-time clinical and operational positions before the end of this year, which implies the company is expecting a surge in demand for its services, or that management believes such a surge can be created via a marketing campaign.
The go-to-market strategy is straightforward - find a health partner, assess need / market demand, roll out logistics and supplies as necessary, and through repetition, increase the number of use cases thus the addressable population of patients requiring mobile health services. Management believes this market is worth in excess of $265bn.
Looking Ahead - Spend Or Save?
One of the really interesting elements to consider in relation to DocGo is the underlying technology, which is how DocGo presumably will coordinate between all of its clients - payers, patients, healthcare providers - and find the cost savings - and margins - that will make it a profitable business.
The company has developed its own fully-integrated front and back end tech, and for my money at least, gathering travel information seems an effective way of accessing the complex world of US healthcare IT systems, which are notoriously fragmented and have so far defied the likes of even a partnership of Berkshire Hathaway (BRK.A) ( BRK.B ), Amazon ( AMZN ) and JPMorgan ( JPM ).
The information that DocGo field executives ought to be able to gather from its executives in the field ought to - just as it has with Uber itself - hand the company an enormous competitive advantage when looking at what areas to target and grow into.
As such, DocGo could potentially benefit from economies of scale now, meaning that the company may perhaps need more cash to spend on R&D, sales executives, staff, and marketing. On the other hand, such a raise would dilute investors, and certainly wipe out any gains generated for shareholders via a $40m buyback programme in Q222.
A cash injection of $500m or so would help DocGo achieve a goal laid out by company CEO Stan Vashovsky on the Q222 earnings call, which is:
to continue utilizing a strong balance sheet and cash flow from operations to expand the breadth, depth and profitability of the company portfolio of services.
Vashovsky has been clear than he will pursue an M&A strategy, commenting that there are:
- several prospective transactions in the pipeline about which we are very excited
DocGo has multiple markets it can address via mobile health services - the municipal market is one, the direct to consumer model another, and the third party model - partners include the likes of Aetna and Blue Cross. Cruise line businesses are another target, CEO Vashovsky told analysts on the earnings call. The company also is responsible for a 35% reduction in Emergency room visits in a major Southern Californian hospital system, management insists.
The only objection I have to DocGo's spend to grow plan is how it may affect profitability - over-investment is often as damaging as under-investment - which is one of the elements that make the business attractive.
The "last mile" model, although promising, as I have discussed above, is not yet proven beyond doubt to be profitable, and that's a potential weakness I would highlight in relation to DocGo - growing pains e.g. revenues plateauing despite higher operational expenses, or even shrinking as mass COVID testing revenues decline. I would not want to see DocGo's business model unravel as a result of entering too many that do not turn out to be lucrative.
Conclusion - Would I Invest In DocGo?
I'm not aware of many similar business models to DocGo's making a real splash on the managed healthcare scene, which suggests that this business is genuinely differentiated, and under certain circumstances I can see it working.
Nurses and paramedics being mobile, able to complete home visits and administer necessary medicines and care ought to result in significant demand for their services, and DocGo staff are in a strong position to recommend additional products and services while patients are sat in the comfort of their own home.
On the other hand, the overheads - paying for vehicles and equipment - seem significant, which I why I do not favor an overly aggressive growth strategy at the present time - take the lessons from the telemedicine industry, and first, see if the model works, before scaling up rapidly if it does.
I believe that's what DocGo management will do, and I believe the biggest single dictator of the company's share price until the end of 2022 will be the scale of deterioration in the COVID testing revenues, and whether those revenues can be offset with growth in other businesses.
That strikes me as the acid test for DocGo because it will either mark the company out as undervalued, if those additional revenues are found elsewhere, or call into question whether the share price is perhaps inflated by the presence of a revenue stream that is about to run out.
In conclusion, although I find the business model interesting and full of possibilities, I would hold off on investing in DocGo for now, but it's an investment case I would certainly revisit, particularly if the market cap sank slightly below $1bn.
For further details see:
DocGo: 'Last Mile' Care More Palatable To The Public Than Telemedicine