OptimizeRx: A Small Company With Big Potential

Summary

• OptimizeRx is the most undervalued company in my digital transformation stock universe.
• The stock price is trading near 52-week lows.
• OptimizeRx's financial messaging product is maturing, but the company is diversifying into new areas.
• The company has a 53% revenue CAGR between 2011 and 2018.
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OptimizeRx Corporation (NASDAQ:OPRX) is a tiny health care company that provides digital health messaging services with the goal of "closing the communication gap between pharma, payers, physicians, and patients."

Trading at near 52-week lows, OptimizeRx is the most undervalued company in my digital transformation stock universe.

(Source: Yahoo Finance/MS Paint)

OptimizeRx had total revenue of $24.6 million for 2019, a 16% increase over 2018. This is one of the smallest stocks that I follow and its small customer base makes for a risky investment. For example, in Q3, the company missed on revenue by 30%, primarily due to two events:

First, one of our clients decided to stop supporting one of the brands about 12 months prior to their loss of exclusivity coming up in 2020, which in our experience was earlier than usual. The loss of this brand represented about $2 million in annual revenue or less than 10% of our revenue for the year

Secondly, the merger of 2 of our larger clients, which is now complete, pushed out about $3 million in revenue from the second half of '19 into 2020.

While OptimizeRx is a risky investment, it may be a smart investment for the turbulent times that we find ourselves in. The company has no debt and is not burning cash. Its free cash flow margin is positive. OptimizeRx is in the process of diversifying its product offerings which should provide some future stability for revenue growth. For these reasons, I am giving this company a bullish rating.

Growth Strategy

OptimizeRx's management believes that the company's financial messaging products are mature and competition will start to influence product pricing. Financial messaging has been the primary revenue driver for the company.

For this reason, the company has made moves to expand into three new but related market segments: payers, medical devices and medical associations. In so doing, OptimizeRx launched an integrated platform:

The power of our platform lies in how we close the communication gap between pharma, payers, physicians and patients like no other solution on the market. Closing this gap with digital solutions has become increasingly important, especially with the wave of new specialty medications coming onto the market and the increasing value being placed on the patient journey when it comes to medication adherence. Better communication translates into better outcomes for patients, lower costs to payers, and for pharma a more engaged field of doctors and patients.

(Source: OptimizeRX)

If the new products get some traction and it appears that they will, then OptimizeRX will achieve more stable revenue growth into the future.

Stock Valuation

The following scatter plot of enterprise value/forward sales versus estimated forward Y-o-Y sales growth illustrates OptimizeRx's stock valuation relative to the 152 stocks in my digital transformation stock universe.

(Source: Portfolio123/private software)

A best-fit line is drawn in red on the scatter plot and represents a typical valuation based on next year's sales growth. As can be seen from the scatter plot, OptimizeRx is the most undervalued stock in the 152 stock universe based on forward sales multiple.

Free Cash Flow

OptimizeRx has a positive free cash flow margin of 3%.

(NOTE: the following chart is prior to the release of Q4 results on Thursday, Feb. 27, 2019.)

(Source: Portfolio123)

Cash Burn

In order to evaluate cash burn, I look at the SG&A expense margin which includes Sales and Marketing, General Administration expenses, and R&D.

(NOTE: the following chart is prior to the release of Q4 results on Thursday, Feb. 27, 2019.)

(Source: Portfolio123)

OptimizeRX's SG&A expense margin is 62% which is pretty decent for a small but growing software company.

Investment Risks

Software stock valuations have been high on a historical basis. Uncertainties, such as the rising tension in the Middle East, trade disputes, and recently the coronavirus, could cause a market downturn. In fact, we are currently in the midst of a correction due to the coronavirus. Software stocks tend to get hit hard during any market turbulence.

OptimizeRx is a small company with a limited number of customers. Loss of as little as one customer could significantly impact revenues and profitability.

The company's financial messaging products are mature. If the company is not successful with its expanded product offerings, then it will result in reduced revenue growth.

A company can be severely undervalued for a significant length of time and there may be an underlying reason that has not been exposed.

Summary and Conclusions

OptimizeRx is a small health care company that provides digital health messaging services. At the end of 2019, the company had revenue of $24.6 million and a market capitalization of $160 million. The company's objective is to "more effectively address the need for greater patient-provider-pharma-payer collaboration and improvement in medication affordability and adherence."

OptimizeRx has had strong revenue growth with 53% CAGR from 2011 to 2018.

(Source: OptimizeRx)

But the small number of customers means that growth can be lumpy and there will be times such as in Q3 2019 when revenue growth will be negative. This makes for a risky investment.

This being said, I believe that this company is well-positioned for the future with no significant debts or cash burn. The company has initiated a level of diversification away from financial messaging, but we do not know how that will play out yet. The company is severely undervalued based on its forward sales multiple. Therefore, I am giving OptimizeRx a bullish rating.

Analyst’s Disclosure: I/we 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.

Comments

[Biorexis]

One thing that I do want to point out about the "soft power" of OPRX - the intersection between drug manufactures, patients and providers. They are probably the only one company with such an extensive connections. It is up to the company to develop products to monetize this.

[kthor]

Who are its clients and potential clients allowing them to grow?

[Biorexis]

I have owned since 2012. The company made some progress but what attracted me initially (financial messaging) is now very clear facing heavy competition. To the credit of this management team, they saw this coming, raised money and purchased two companies in 2018/2019. Now OPRX has a new package of product to offer. The CEO believes the new products and there is also indication for some growth in business. We have not seen in their financial result yet.

We are still talking about a small market here with current products. The CEO said that he is comfortable with consensus projections with analysts, i.e. 30-40 Million, in the next 2 years, This is a far cry from several billions of TAM (Total Addressable Market) claimed by OPRX but good enough for a micro company. Again, OPRX claimed to have billions of TAM for financial messaging product, it turned out to be only ~20 million. So, investors put them into a penalty box and rightly so at the moment.

OPRX may come up with more new products either developing internally or purchasing other companies. As long as they are cash flow positive, they will have a chance to be successful.

[CWatsonSD]

I've owned this for a while and though I agree they have some nice potential upside they need to start showing better results instead of continually talking about potential. I'm not selling and will hope CEO comments this past week actually become results rather than cool slides in a presentation. Maybe they improve in Q1 and then provide nice guidance for balance of year.