Disruptive Healthcare 2/23/2024: Earnings in Focus
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Earnings Season
The story this week and next will be Q4 earnings reports for our disruptive healthcare comps. This week, two of our peers reported earnings: TDOC and HCAT and both companies saw their stock decline sharply on the reports.
1-Day Share Price Performance Post Earnings:
TDOC - Per Yahoo Finance… Teladoc stock plunges on weak revenue guidance.
HCAT- Per Yahoo Finance… HCAT Reports Revenue Growth and Margin Expansion in Q4 and Full Year 2023.
Next week half of the peer group will report earnings. This batch of reports will give us tremendous insight into how the companies in our space are doing and what to expect in 2024. Companies reporting next week include VEEV, RCM, PGNY, LFST, GDRX, PRVA and HIMS. Stay tuned to see how the broader group performs.
Disruptive Healthcare Public Comps:
Top 5 Revenue Multiples:
This group is a subset of the broader disruptive healthcare peer set. These 5 currently have the largest EV / 2024 Revenue multiple. This group trades at 6.7x 2024E revenue versus the broader group at 3.5x.
Comps Weekly Share Price Performance:
Disruptive healthcare companies had a tough week in the stock market this week relative to the S&P 500. Our peers were down an average of (8.8%) while the S&P moved up 1.7%.
Valuation — EV / NTM Revenue:
Mature healthcare comps are generally valued based on their earnings (see the broader comps at the bottom of this post). However, earlier stage businesses such as startups, and to an extent these younger, disruptive healthcare public companies often don’t have positive earnings yet or they may have positive earnings, but they haven’t reached the margin profile they will achieve upon maturity as a business. As a result, it’s harder to compare these companies on an apples-to-apples basis using EV to earnings. So, we use EV/NTM revenue to triangulate valuation for these companies and for startups in similar markets.
Summary EV / NTM Revenue Valuation Stats:
5 Year Average: 7.0x
Today: 3.4x
Peak: 15.1x
Trough: 2.5x
Summary of top 5 EV / NTM Revenue Valuation Stats:
Top 5 companies include VEEV, HQY, GDRX, and PHR as of today.
5 Year Average: 11.3x
Today: 6.8x
Peak: 23.7x
Trough: 4.9x
Valuation — EV / NTM EBITDA:
It’s a little bit harder to value the earlier cycle businesses on an EV / NTM EBITDA, but it’s worth considering the data point. Only 8 of these 15 companies have positive NTM EBITDA projections right now, or barely positive EBITDA. The ones with barely positive EBITDA yield EBITDA multiples that aren’t realistic (so we consider them not meaningful “NM”). To create an index, I only include the peers who have a substantial believable positive EBITDA forecast for 2024 based on the average of Wall Street equity research reports. Those companies include: VEEV, HQY, DOCS, RCM, PGNY, TDOC, GDRX and GOCO. That’s not to say the other Companies won’t have positive EBITDA in 2024, but the multiples are relevant right now. Here’s how the chart looks.
Summary EV / NTM EBITDA Valuation Stats:
5 Year Average: 36.7x
Today: 14.5x
Peak: 64.4x
Trough: 12.0x
As these companies mature and begin to trade on EBITDA multiples or even P/E multiples (much like the hospital facilities and MCO peers) then this chart will tell us more. This is certainly a data point we can look at for profitable growth equity stage private companies. I’d expect those companies to be valued closer to the 5-year average or slightly lower. Some of that data in 2019 and 2020 is elevated because the EBITDA estimates back then were very small or barely positive for some of these companies driving an artificially high multiple that wasn’t driving valuation but rather was a dependent variable.
Stock Price Trends:
Recently, we added the inverse 10-Year Treasury rate change to our charts. There is a very strong correlation between interest rates and the stock price performance of earlier stage companies over time.
In the stock price charts below we compare the Disruptive Healthcare peers to the S&P 500, the XLV and the inverse of the 10 Year Treasury rate over various time horizons. For those that aren’t familiar, the XLV is the S&P500 healthcare ETF which includes a wide mix of companies in the health care equipment and supplies, health care providers and services, biotechnology, and pharma industries. Some companies in the XLV include Johnson & Johnson, Pfizer, UnitedHealth, AbbVie and Eli Lilly and their peers.
I’ve mentioned this in prior weeks, but our disruptive healthcare peers seem to have bottomed as a group on November 9th, 2023. Since that time, they have outperformed the broader market although that gap has narrowed in the last week (with a lot of that due to TDOC getting crushed after earnings).
On the whole, we believe this is because of a broader rotation of capital back into the healthcare space after a couple years of an over correction in the other way. We are seeing similar flows in the private market deals we are participating in right now as well.
Broader Healthcare Comps Set as of 2/23/2024:
This newsletter is mostly focused on the disruptive healthcare comps and how their performance drives valuation for our private market portfolio at What If Ventures. However, we do keep a much broader set of comps that includes Healthcare Facilities and Managed Care Organizations. I know the font is small, but you should be able to click on these and expand.
^I realized this is too small to read, but if you double click on the image it should expand.
I hope this is helpful!
What’s Missing?
What else would you like to see in our weekly data? Please comment and let us know.
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About What If Ventures — What If Ventures invests in mental health and digital health startups from seed stage to growth equity. To date, we have invested over $83mm into 70 healthcare startups since January 2020.
If you have questions about any of this analysis or want to collaborate with What If Ventures, please reach out via info@whatif.vc. We’d love to connect with entrepreneurs and investors in the space.
You can follow more of my commentary on twitter here: @hazesyah
Great overview! Ty