WebMD: A Game Changer That's Cutting Costs

| About: WebMD Health (WBMD)
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WebMD's (NASDAQ:WBMD) share price declined based on lower revenues. This news affords an attractive entry point for a disruptive stock.

WebMD to Cut Costs

WebMD provides medical information online and it sources its revenue mainly from advertisements and sponsorships. The ad business is however at risk due to expiration of patents of several major brands of drugs this year. The advertising unit also has to comply with stricter rules of the Food and Drug Administration while battling with health-centric competitor websites like ShareCare.

Though revenues in the third quarter amounted to about $118 million, the resulting $885,000 quarterly loss brought the need to cut down on operating expenses. WebMD hopes that all the cost cutting measures will help cut down on expenses by about $45 million. Revenues are also much lower in the third quarter than they were same time last year when the company was making profits.

WebMD is set to lay off about 14 percent of its staff in a bid to reduce operating expenses and thus increase profits. 60 employees have already been laid off in Atlanta and the expected job cut will see about 250 other members of staff lose their jobs. This move is significant especially because it will involve members of staff in major departments including sales, software development and video production. The Information Technology and editorial department will also be affected by the cost cutting measure.

The market seems to be responding well to the cost cuts as the share prices went up by about 12 percent. WebMD Chief Executive Officer Cavan Redmond supported the move to reduce operating expenses. According to Redmond, "Becoming leaner and more nimble will enable the company to extend our leadership in this highly dynamic and increasingly demanding marketplace."

As a result of the cost reduction initiative, the company expects to take a $6 - $8 million pre- tax restructuring charge.

Labor-Disrupting Technologies

One megatrend that has played out over and over again for centuries is the replacement of labor by automated machine processes. This has happened in agriculture, manufacturing, and the service industry. Though many of the positions that have been made redundant are often considered low-skill, there are many supposedly safe, high-skill jobs which could easily be automated or outsourced under the right circumstances. Which tech stocks stand to benefit from such changes? Are any of them trading at reasonable valuations?

Remember travel agents? They were very useful for coordinating flights, hotels, and other travel arrangements before the internet revolution made such information readily available. Now anyone can make travel plans using Expedia (NASDAQ:EXPE).

Real estate agents, professors, and even doctors could become as threatened as travel agents by the widespread use of new technologies. There are many companies which are trying to develop and deploy the technology to provide substitutes for highly paid professionals.

Some of the surgery done by human beings could be done by machines with higher precision. Intuitive Surgical (NASDAQ:ISRG) marketed devices which translate the natural hand movements of doctors into tinier machine motions for microsurgery. Conceptually, a surgeon could be located across the globe. This company could allow surgeons to be outsourced much like x-ray analysis has been outsourced. At $549 per share equity in this company is rich on a price-to-sales basis since shares trade at a 10.60 multiple, incredibly higher than the 1.32 the S&P 500 average. Intuitive Surgical shares are trading at a lofty 35.48 price-to-earnings ratio, a price multiple that is more than twice the 14.23 PE ratio of the S&P 500. This stock is clearly richly valued.

Fortunately, a growth-at-reasonable-price opportunity is available through the purchase of WebMD Health stock trading around $15.47 per share. Today, the firm's 1.57 price-to-sales ratio is in line with today's prevailing market multiples. Though its shares are trading at a high 176.83 price-to-earnings ratio, its price-to-book multiple is 1.50, cheaper than the 2.07 S&P 500 average. Investors should consider this number to be an upper estimate because the price-to-book ratio fails to account for internally-developed intellectual property including patents, brands, and trademarks. If the economic value of these assets were even partially recorded on the balance sheet the firm's price-to-book ratio would be lower. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 20.0% per year.

The ultimate use of WebMD would be to automate or expedite diagnoses. This would drastically reduce the need for general practitioners and nurses who repeatedly ask you to explain your ailments. These people are the health-care equivalents of travel agents. They typically don't administer treatments but instead refer you to a pharmacist or a specialist. Similarly travel agents didn't clean hotel rooms or fly planes. Like travel agents, general practitioners and many nurses serve as gatekeepers for healthcare treatment. WebMD could effectively automate the gatekeeper role in healthcare.

It is unclear whether the widespread use of WebMD's information services seems like a much more likely story than surgical outsourcing by Intuitive Surgical. Intuitive Surgical would require locating cheaper or better surgical talent overseas and the deployment of their devices. In contrast, WebMD would mostly require that healthcare customers use their products on their computers and mobile devices to manage their healthcare information. Unfortunately, widespread use would require a cultural shift in the doctor-patient relationship and some openness to change by doctors. Don't hold your breath.


WebMD offers valuations which as a whole are more attractive than those of Intuitive Surgical. Moreover, WebMD would require less capital expenditure if it ever needs to achieve scale for widespread use. However, investment in either company should be tempered with the wisdom that disruptive change requires more than just technology.

Please read the article disclaimer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.