2023-06-09 12:46:56 ET
Summary
- DocGo is well-positioned to capture a significant share of the under-penetrated $250 billion virtual healthcare market.
- The company's user-friendly platform and real-time data access provide a competitive advantage, supporting long-term growth prospects.
- I view the stock as a buy, with an end of year price target of $13 on the stock.
Thesis
DocGo Inc. ( DCGO ) is well-positioned to capture a significant share of the underpenetrated $250 billion virtual healthcare market, with a $95 billion addressable market in the US alone. With the aging population, rising adoption of virtual care, and the ongoing prevalence of chronic conditions, DocGo's transportation and mobile health services offer valuable solutions to address these needs. The platform's user-friendliness and real-time data access provide DCGO with a significant advantage over its competitors, supporting the company's long-term growth prospects. I assign a buy rating to the stock and have an end-of-year price target of $13 on the stock.
Q1 2023: Pressure on Margins But I Remain Optimistic
DCGO's first-quarter revenue was in line with market expectations, however, the Q1 EPS missed estimates. The EBITDA was slightly lower than expected due to pressure on gross margins, although this was offset by disciplined general and administrative ((G&A)) expenses, resulting in a 5% EBITDA margin. The increased costs affecting gross margins in the first quarter were primarily due to higher overtime and contract labor expenses related to expediting a new project. The previous service provider for a specific contract stopped servicing the client earlier than planned, prompting DCGO to accelerate its onboarding and ramp-up process, which incurred additional costs.
The gross margins and lack of significant top-line growth in the first quarter are likely to be concerns for investors leading up to the second-quarter results and the company's investor day on June 20th. However, I believe that DCGO's growing backlog, improved efficiency in G&A expenses, and a more favorable labor environment will help counterbalance these concerns. DCGO has observed improvements in turnover rates and is already experiencing the positive effects of a more relaxed labor market, resulting in decreased costs to staff projects from the fourth quarter to the first quarter. Looking ahead, I remain optimistic about the company's long-term prospects, especially with its expanding initiatives in remote patient monitoring and an outstanding request for proposal ((RFP)) lifetime contract value of $1.5 billion. This indicates a substantial total addressable market ((TAM)), which is expected to grow further as additional service lines are introduced over time. The partnership with Fresenius will provide valuable insights into how remote patient monitoring can contribute to DCGO's P&L, particularly as DCGO aims to monitor over 50,000 patients remotely by the end of 2023. However, in the short to medium term, maintaining credibility with shareholders will depend on successfully managing margins, and I anticipate this will be the key focus going into the second quarter.
Expanding Markets to Drive Revenue Growth
DCGO's long-term revenue growth is supported by its expansion into new markets, currently operating in 29 states with 21 pending licenses. This expansion strategy aims to increase DCGO's market share, which currently stands at less than 1% in an $80 billion TAM. To achieve this, DCGO is actively seeking partnership opportunities and leveraging its Medical Mobility offering. In addition to new markets, DCGO also sees opportunities for growth in its existing markets. Specifically, there is potential to expand service line capacity in the Medical Mobility sector through initiatives such as obtaining a Durable Medical Equipment, Prosthetics, Orthotics, and Supplies license, securing federal contracts, providing transport brokerage services, and offering Personal Emergency Response Systems ((PERS)). Similarly, in the Mobile Health sector, DCGO aims to expand its service lines by introducing services like Mobile Phlebotomy, Palliative Care, Chronic Disease Management, and expanding its business-to-consumer ((B2C)) offerings. I believe that these expansions in both new and existing markets have the potential to drive long-term growth for DCGO.
Defensible Competitive Moat Compared to Peers
DCGO is a pioneering company in creating a comprehensive mobile healthcare and medical transportation platform. DCGO utilizes AI to select and dispatch appropriate vehicles and personnel based on patients' medical requirements, navigate through unpredictable traffic to ensure timely appointments and assess the insurance costs associated with each trip.
The company has created a user-friendly interface that is easily accessible for patients, providers, and payers. This interface seamlessly integrates with other technologies within the platform. By offering simplified patient ordering, integration with electronic health records ((EHRs)), real-time tracking of transport status and ordering, accurate billing, and timely estimates of patient discharge, DCGO enhances the quality of care, reduces healthcare costs, and improves satisfaction among patients and providers, leading to better treatment outcomes. These advantages give DCGO a competitive edge over its competitors, enabling the company to achieve long-term growth.
DCGO's technology platform comprises multiple components, such as Dara, a central AI system responsible for managing scheduling; HealthPoint, a patient portal for service requests; Mana, a billing and payment system; and the Requestor and Driver apps for coordinating patient transport. These components are seamlessly integrated and designed with user-friendliness in mind for both patients and providers. Additionally, the platform provides real-time access to data. These distinctive features provide DCGO with a significant competitive advantage over its peers, supporting the company's long-term growth prospects.
DocGo aims to provide integrated solutions and disrupt the healthcare services sector by offering an innovative combination of telehealth and physical contact through last-mile medical transportation. This unique approach sets DocGo apart, enabling them to differentiate themselves, expand their operations, and ultimately capture a larger share of the market. An overview of the company's differentiating features vs Peers is shown in the image below.
Valuation
DCGO currently trades at 2.03x EV/Revenue, which is below the sector median of 4.09x. My end-of-year price target of $13 assumes a 2.3x EV/Rev multiple applied to the 2024 estimated revenue. I believe an improvement in the gross margins and increased revenue growth driven by high backlog would drive the multiple re-rating towards peer multiples in the range of 3x-4x in the medium term.
Risk Assessment
DCGO relies heavily on one customer, which represents approximately 35% of its total revenue. Any disruption or loss of this customer relationship would have a significant impact on the company's revenue. Moreover, the transportation segment of DCGO's business is influenced by the volume of surgeries and procedures in the markets they serve. A decrease in surgery volumes could hinder revenue growth and make it challenging to meet the company's long-term growth targets.
Conclusion
DocGo's transportation and mobile health services offer solutions within a virtual healthcare TAM valued at approximately $250 billion. Given the aging population, growing adoption of virtual care, and the persistence of chronic conditions, I believe DocGo is strongly positioned to seize a significant portion of the market share. I assign a buy rating to the stock and have an end-of-year price target of $13 on the stock.
For further details see:
DocGo: Poised For Success In The Lucrative Virtual Healthcare Market