2023-09-26 18:07:47 ET
Summary
- GoodRx is generating solid profitability with growth in monthly active consumers to its prescription drugs discount platform.
- Management expects stronger trends into the second half of the year.
- The stock has been under pressure since the last quarterly report, although we see value at the current level with room for shares to rebound going forward.
GoodRx Holdings Inc ( GDRX ) offers an online pricing comparison tool for prescription drugs tracked at more than 75,000 pharmacies across the U.S. The business model centers on capturing a transaction fee from customers utilizing coupons to secure discounts in addition to premium subscription service which secures even more savings.
With more than six million active customers, the strategy has worked with an impressive growth trend and climbing profitability. While the stock has faced extreme volatility since its 2020 IPO, the sense is that the financial momentum is finally coming around.
We like GDRX following a recent selloff since the last quarterly report and see room for shares to climb higher supported by positive fundamentals.
GDRX Financials Recap
GDRX last reported its Q2 earnings in early August with non-GAAP EPS of $0.07, which beat the consensus by $0.01. Revenue in the quarter of $189.7 million, declined by -1.1% year-over-year, but was also ahead of estimates. That top-line decline warrants a deeper look as there are a couple of moving parts.
The first point here is that the core Prescription Transactions Revenue climbed by 2% y/y and represents 72% of the total business. A 5% increase in the total number of monthly active consumers highlights the underlying brand momentum.
This has helped balance an -8% decline in subscription revenue where the number of plans at 969k is down from 1.1 million in the period last year. The bulk of this decline is related to a loss in members associated with a partnership with the grocery chain Kroger Co ( KR ). Simply put, changes to the "Kroger Savings Club" in terms of prescriptions covered have meant that fewer customers are incentivized to join the service.
That being said, the stronger point here is that the stand-alone "GoodRx Gold" service saw a climb in subscribers which we take as a more positive read on the segment momentum going forward.
In 2022, GoodRx hiked monthly pricing for Gold to $9.99 from $7.99 for the individual plan and from $15.99 to $19.99 for families. This move has helped with margins while balancing the Kroger impact. The result is that Q2 adjusted EBITDA of $53.5 million is up from $47.2 million in the period last year. The adjusted EBITDA margin of 28.2% compares to 24.6% in Q2 2022, also benefiting from efforts at controlling expenses.
For the full year 2023, management is guiding for total revenue between $750 and $760 million, representing a decline of -2% to -1% compared to 2022 reflecting the Kroger business volatility. An EBITDA margin guidance in the "mid-to-high twenty-percent range" implies an EBITDA level of around $210 million which is near the current annualized run rate.
Finally, we can bring up that GoodRx ended the quarter with $762 million in cash and equivalents against $714 million in total debt. We view the balance sheet liquidity position as a strong point in the company's investment profile.
What's Next For GDRX?
The financial trends from GDRX speak for themselves. This is a quality business generating steady cash flows and providing a valuable service to millions of people saving money compared to the retail price of necessary medications.
For reference, the deals are possible based on the market feature where pharmacy benefit managers (PMBs) as a sort of middlemen are able to negotiate pricing across pharmacy networks and insurance plans which effectively spreads the average retail pricing between channels.
By this measure, GoodRx serves as a sort of marketing or distribution outlet for the PMBs through the discount cards, each collecting a share of the prescription fee.
Data shows that these discount cards are becoming more and more popular, representing more than half of all patient-paid prescriptions, which reached 9% in 2022 compared to 6% in 2016. Naturally, this trend is positive for GoodRx.
On the other hand, this model of providing drug discount cards has been the focus of some controversy and contention, particularly from pharmacies that are seeing some of their margins squeezed .
The risk as we see it, is that this contention could translate into some type of market shift or regulatory changes implemented to diminish the power of PMOs and discount drug card providers.
The move by Kroger, for example, to negotiate directly with a PMB and thereby undercut GoodRx's business highlights the dynamic landscape that could threaten GoodRx's position longer-term.
The point here is that there are some valid questions regarding GoodRx's "economic moat" and its market power. Consumers might love the service, but pharmacies and PMBs ultimately have more control of the situation.
For the time being, the outlook here is to keep growing. According to consensus estimates, GoodRx earnings are set to accelerate into 2024 with a return of top-line growth above 10% as it begins to lap the Kroger relationship setback. Management's adjusted EBITDA guidance for 2023 above $200 million implies a current EV to EBITDA multiple of around 10x, which appears attractive in our opinion.
GDRX Stock Price Forecast
We rate GDRX as a buy with a price target for the year ahead at $7.00 implying an EV to forward EBITDA multiple of 13x. In our view, the recent selloff has gone too far with the current level more than discounting some mixed operating metrics as the company moves beyond its partnership with Kroger.
A return in top-line growth by next year along with evidence over the next few quarters that subscriber numbers are stabilizing with momentum in the GoodRx Gold service could be enough to sustain a stronger rally in the stock.
We mentioned the risks of the U.S. pharmacy ecosystem over time. In the near term, weaker-than-expected results with a more concerning slowdown in the number of active consumers would force a reassessment of the outlook. Financial monitoring points include the EBITDA margin and net cash flow.
For further details see:
GoodRx Stock: Earnings Momentum Keeps It Interesting