2023-06-23 11:58:37 ET
Summary
- LifeStance Health Group has experienced strong share price movement (50% increase since January) and exceeded my expectations on top-line growth.
- Near-term EBITDA is expected to be muted as management focuses on investments to build a scalable and profitable platform for the future.
- Stock price should be range-bound in the near term as investors await EBITDA inflection, post the ongoing investments.
Overview
LifeStance Health Group ( LFST ) performed much better than I expected fundamentally, which also resulted in a strong share price movement (50% increase since January). My mistake previously was the failure to recognize the market's positive perception on the stock, which has driven the valuation to 3.5x forward revenue (I modelled 1.9x previously). I reiterate my hold rating as, despite the strong secular tailwind for topline growth, EBITDA is expected to be muted in the near term as management remains focused on investments in the platform over the near and medium term to build a scalable and profitable longer-term platform. As such, I don't think the market will apply a further premium to the stock, and momentum traders will likely exit the stock until EBITDA starts to inflect.
Muted EBITDA in the near term
Reinvesting in the business to ensure its future scalability is a smart move, in my opinion, even if it does put some pressure on margins in the short term. Over the next few years, the management plans to implement a number of strategic initiatives, one of which is to construct an enterprise-level, scalable infrastructure. With this new setup, the company will be able to accommodate 8,000 workers, boost their EHR, and streamline their credentialing and clinical onboarding procedures. All of these come at a cost which should be reflected in the G&A cost line. The obvious benefit of this is that LFST can meet increased demand without hitting any capacity limits. Long-term, this should improve LFST's scale margins by allowing the company to process a larger volume of units while taking advantage of economies of scale. Remember that LFST uses a hybrid model, which broadens access to patients across more areas with less effort on their part. With the enhanced infrastructure, this model becomes more strategically valuable from a margin expansion perspective as LFST can handle much more patients at once. On the flip side, pressure will be put on margins and earnings in the coming quarters and years. This should put a lid on how high the valuation would go, consensus estimates, and the stock's sentiment. Despite my optimism regarding revenue growth (supported by secular tailwinds), I believe the market will be more preoccupied with the timing of the investments' completion, which will serve as the stock's re-rating catalyst as EBITDA margin begins to inflect.
Clinicians growth expectations
My confidence for visible revenue growth target is based off my understanding of LFST's value proposition to both clinicians and mental health patients. I believe this resonates with solo clinicians, in particular, as it reduces non-essential business processes like marketing and invoicing, which adds a significant amount of stress to the already demanding schedules of solo clinicians. Despite the going state of the economy, I don't see any shift in the secular trend for LFST's industry as the structural issue of lack of access is still prevalent in the US. I expect LFST to continue its momentum of recruiting and retaining clinicians as they have only tapped on to a very fractional part of the market so far. In particular, management stressed the company's exclusive clinician database, where only 1% of the market has been tapped so far, leaving substantial room for growth. I think what is encouraging is also that management is going for quality growth by recruiting clinicians that fit their ideal profile. While this might slow down the pace of growth, I believe this leads to a more sustainable growth over the long term as service quality can be assured.
Upside catalyst
There is great potential for improved reimbursement rates from payors to result from the generation of clinician and economic outcome data. In particular, the company's value proposition to payors is strengthened as it continually collects data demonstrating positive clinical outcomes and establishes a clear connection between these outcomes and a reduction in acute events. This improves LFST's bargaining position with payors, allowing them to exert more influence and obtain more favorable terms in negotiations.
Conclusion
LFST has exceeded expectations both fundamentally and in terms of share price performance. Despite my previous oversight regarding the market's positive perception of the stock, resulting in a higher valuation, I maintain a hold rating. While the company benefits from a strong secular tailwind driving revenue growth, near-term EBITDA is expected to be subdued due to ongoing investments in platform development.
For further details see:
LifeStance Health Group: Muted EBITDA In The Near-Term To Depress Share Price Movement