2023-09-10 03:56:34 ET
Summary
- LifeMD reached positive operating cash flow for the first time during its fiscal 2023 second quarter.
- This boosted the telehealth company's cash and equivalents position and formed an inflection point for its investment pitch.
- WorkSimpli is experiencing material year-over-year growth and could exit LifeMD's fiscal 2024 with a $100 million revenue run rate.
LifeMD's ( LFMD ) common and preferred shares form strong buys as the telehealth company looks set to realize a dramatic revenue ramp and a material improvement in its underlying profitability and balance sheet. For the Series A preferred shares ( LFMDP ) the income is the prize and these currently offer an 11.7% yield on cost that six months ago seemed too speculative and a near-binary option on a company whose liquidity position was facing intense headwinds and its ability to remain a going concern was being flagged by common shares which had fallen 96% to just over $1 per share from a high of $30 in early 2021. Why are both tickers a buy? Growth and a return to par value.
The Series A preferreds are currently trading for $18.90 per share, around a $6.10 difference from their $25 par value. This 24% discount to par represents the upside to be captured on the safer security. Critically, the risk-reward paradigm on these has shifted solidly to the reward side as LifeMD looks set to realize greater revenue with a cash runway that has been significantly expanded. The common shares offer significantly more upside potential with a price-to-sales multiple of 1.15x set against healthy revenue growth and positive non-GAAP EPS for LifeMD's last reported fiscal 2023 second quarter.
The Investment Pitch And Risk
LifeMD Fiscal 2023 Second Quarter Form 10-Q
LifeMD realized second-quarter revenue of $35.9 million , around an 18% increase from its year-ago comp as WorkSimpli realized year-over-year revenue growth of 66% to bring in $13.6 million. This meant the SaaS platform for products to manage work-related tasks constituted 37.8% of second-quarter revenue, up from 26.9% in the year-ago period. Gross profit at $31.4 million also advanced 21.6% from its year-ago period with gross profit margins at 87.35% as of the end of the quarter also up 257 basis points from 84.78% in the year-ago quarter.
Hence, LifeMD is set to grow more profitably. The expansion of gross margins is set to continue as WorkSimpli expands its clout within the company's broader operating footprint. A short interest currently at 7.16% is also down 112 basis points since my prior article on June 26 as expectations that the company will have to tap its equity through a dilutive fundraising event get dialed back. Liquidity is key against a macroeconomic backdrop where the Fed funds rate currently sits at a 22-year high at 5.25% to 5.50% with recent comments from Fed officials that not only is the rate set to stay higher for longer but there might be further hikes with current rates not restrictive enough. Another hike could spark downward volatility with both securities.
Critically, this restrictive backdrop for the capital market will likely keep sentiment on LifeMD more muted than it otherwise would have been. To be clear, the company was trading hands for $30 per share in early 2021 with its revenue base and profitability at a significantly lower level than present. Sentiment attached to each dollar of revenue earned is reflected in the price-to-sales multiple, hence, an end to the most aggressive period of monetary tightening in decades could provide an uplift to the common shares. The core takeaway from the quarter was that the company achieved positive cash flow ahead of schedule with $4.64 million in cash from operations generated.
Further Upside As Inflection Point Reached
LifeMD August Investor Presentation
In many ways, the second quarter represents an inflection point for LifeMD as it achieves self-sustenance, indefinitely extending a cash runway that could have been measured in months as of the end of its fiscal 2022. The company provided cash flow guidance for its fiscal 2023 where it expects its end-of-year cash balance to come in between $13 million to $15 million . This dispels most risks to the $750,000 per quarter preferred stock dividends. Hence, with the company now set to expand this cash position through 2024, we could see a revival of greater enthusiasm in the common shares, pushing them to new highs on the back of a fundamentally more profitable company.
The company is also guiding for fiscal 2023 revenue to come in at between $146 million and $152 million, which would place its forward price to sales multiple at 1.04x against the top end of this range. I like that telehealth active subscribers increased 15% over its year-ago quarter to roughly 193,000 patients and that WorkSimpli holds the potential to exit 2024 with a $100 million recurring revenue run rate. 2024 stands to be a pivotal year for the company as headwinds seem set to stay in the rearview mirror and the market becomes more cognizant of the new cash-generating entity. Both securities are a buy against this but expect more volatility.
For further details see:
LifeMD: I'm Buying The Commons And The 11.7% Yielding Preferreds