Disruptive Healthcare 7/11/2024 - HC Beating the Broader Market This Week
Disruptive healthcare valuation, trends and analysis weekly.
Disruptive Healthcare Outpaces Broader Market:
It’s been a while since we’ve had a week like this. As inflation seems to be coming under control, and interest rates are pulling back to fresh lows, we saw a wild swing in investor interest this week away from the MAG-7 stocks into overlooked sectors that have lagged for quite some time. Our sector was one beneficiary of this rotation this week.
As you can see in the 1-week stock chart below, the Disruptive Healthcare peers traded up 4.3% over the last 7 days outpacing the S&P 500 and the broader XLV industry index (which also beat the S&P).
If we look closely at each stock in our index and how it performed this week we can see that there are a few names that really drove the index up this week.
I think generally a few things are happening here:
Rates Dropping - The cost of capital is going down. This can make sectors that rely on longer hold periods (like healthcare) to see valuations really rebound. Just look at the yellow line in our stock price charts below. That line represents the inverse movements of the 10-year bond rate. When rates go down, that line goes up, and you can see visually the strong inverse correlation to our peers’ stock price performance.
Equity Analyst Sentiment Improving - This week we saw several equity analysts raise price targets and estimates on some companies that have been punished by traders for a long time. Phreesia is an example, as an analyst raised their price target to $27 this week igniting a 10% increase in the stock over one day on Thursday. Amwel is another success story this week with the stock climbing 36.0% over the last 7 days largely in part to their 1-for-20 stock split announcement. Health Catalyst and Lifestance also saw an uplift this week with improving outlook among analysts and a bit of a short covering move in Lifestance stock.
Sector Rotation - When we look at what stocks traded down this week, and which ones traded up, it’s clear that investors are starting to seek yield in names that have been overlooked to date. We’re seeing this also play out in the private markets as capital is certainly becoming more readily available for private companies who have shown an ability to improve their unit economics and still grow over the last 24 months. We’re going to see more capital coming into our sector over the next 6 months.
Here you can see how the peers have performed over the last 12 months:
Peer performance since recent peak in February 2024:
On to valuation…
Disruptive Healthcare Public Comps:
Our Disruptive Healthcare peer group is currently trading at 3.3x 2024E revenue and 2.9x 2025E revenue.
Top Revenue Multiples:
This top 4 group is a subset of the broader disruptive healthcare peer set. These 4 currently have the greatest EV / 2024 Revenue multiple. This group trades at 6.9x 2024E revenue versus the broader group at 3.3x. This group also boasts an average EBITDA margin of 39.9% on 2024E projections versus the broader group at 18.1% 2024E EBITDA margin on average.
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 of EV / NTM Revenue Valuation Stats:
5 Year Average: 6.5x
Today: 2.8x
Peak: 15.1x
Trough: 2.4x
Summary of top 4 EV / NTM Revenue Valuation Stats:
5 Year Average: 12.3x
Today: 6.8x
Peak: 26.4x
Trough: 5.8x
Valuation — EV / NTM EBITDA:
We were previously only looking at 8 companies from the perspective of EV/NTM EBITDA, but since Q1 earnings have reported, more analysts are projecting positive EBITDA in 2024 and beyond for more of the peers so we have expanded the index here to include 11 of the 16 companies.
To create an index, I only include the peers who have a substantial believable positive NTM EBITDA forecast based on the average of Wall Street equity research reports. The comps with barely positive EBITDA yield EBITDA multiples that aren’t realistic (so we consider them not meaningful “NM”).
The included companies are: VEEV, HQY, DOCS, RCM, PGNY, TDOC, GDRX, GOCO, HIMS, LFST, and PRVA. 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:37.9x
Today: 15.6x
Peak: 85.0x
Trough: 15.2x
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.
Broader Healthcare Comps as of 7/11/2024:
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 realize this is too small to read, but if you double click on the image it should expand. Or you can just email me and I’ll send you the backup.
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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 $85mm into 73 healthcare startups since January 2020. The firm is actively managed by Stephen Hays.
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 Stephen’s commentary on twitter here: @hazesyah