GoodRx Holdings: Expensive, But A Quality Prospect

Summary

• GoodRx continues to demonstrate that it's a strong company with excellent long-term potential.
• Its continued bottom line performance is encouraging and it's rare for a company like this.
• Shares are very expensive, though, and as a result, it may take a long time for this company to play out for bulls.
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One of the most interesting companies on the market today has got to be GoodRx Holdings (NASDAQ:GDRX). GoodRx was founded on the concept of trying to do well for itself and its investors by doing good for society. The company enables the users on its app to find the lowest-priced prescriptions and other medications at nearby pharmacies. Management has built out a wide array of other functions that allows shareholders monetization opportunities. At present, the company is valued at $17.4 billion, but the fact of the matter is that shares are trading quite a bit lower than their 52-week high. All things considered, the company does look to be rather expensive still, but if recent growth continues and the company grows its cash flow over time, then this premium price tag might well be worth it.

A look at GoodRx

As I stated, GoodRx was founded on the idea of providing discounted options for medications at nearby pharmacies. Although this may not sound significant, it is. Management estimates that 5.8 billion 30-day equivalent prescriptions are written in the US every year. That works out to a market opportunity of $360 billion. What's more, the industry is slated to grow at a rate of 5.7% per annum through at least 2028. That would take the opportunity to more than $560 billion annually.

The most recent data available indicates that consumers who took there GoodRx code to a local pharmacy saved, on average, more than 70% on the list price of the drugs that they acquired. Through the third quarter of its 2020 fiscal year, this amounts to savings of more than $20 billion. The company also has built up a rather significant network. Its platform touches on 150 billion price points in more than 70,000 pharmacies. This has attracted more than 15 million monthly visitors to the platform.

GoodRx’s customers tend to be those who need it the most. 34% of them are on Medicare. 26% of them are uninsured. And 4% are on Medicaid. This is all especially important when you consider that an estimated 20% to 30% of prescriptions in the US go unfilled every year due to financial reasons. Management has also created additional products over time. These include certain types of premium subscriptions, an online primary care visit and lab testing service, telehealth solutions, and more. For more specifics on how the company generates revenue, I encourage you to see my prior article on the company here.

As the number of people using GoodRx has grown, so to have we seen the company's revenue and profitability grow. Revenue in 2018 was $249.5 million. This jumped to $388.2 million in 2019. Over this timeframe, net income grew from $43.8 million to $66 million. Operating cash flow grew from $45.3 million to $83.3 million. And EBITDA grew from $127.6 million to $159.6 million. It's worth mentioning that this represents some of its slower growth in recent years. For instance, EBITDA actually more than doubled from 2016 to 2017. And it more than doubled from 2017 to 2018.

This growth has continued on into the company's 2020 fiscal year. Revenue in the first three quarters of the year was $397.2 million. This compares to $275 million seen the same time a year earlier. Net income did drop significantly, falling from $32.9 million to $3.1 million, but that's due in large part two significant stock-based compensation. Operating cash flow over this timeframe has grown from $66.8 million to $116.5 million. And EBITDA has expanded from $117.8 million to $154.4 million. What's also great is that the company technically has negative net debt. Cash and cash equivalents total nearly $1.1 billion, while debt is just $710.9 million. This means that the company's market capitalization is higher than his enterprise value, which is rare for a fast-growing company. Speaking of rare, so too are positive earnings and positive cash flow like this. That is what investors should find particularly intriguing about this prospect.

There's no denying though that shares are expensive if the fourth quarter results, which management is expected to announce in a little over a week, see the same kind of year over year growth that we saw in the first three quarters of 2020, then the company’s operating cash flow for the year should be $145.3 million. This implies a price to operating cash flow multiple of 119.9. Its EBITDA, meanwhile, should be around $209.1 million for the full year. This implies an EV to EBITDA multiple of about 81.5.

There's no denying that these are astronomically high multiples for any firm to be trading for. However, the company's rapid growth, which has continued despite a rocky second quarter last year, is highly encouraging. Cash flow growth is stellar, and if we see these metrics expand at a rate of just 25% per annum for the next five years, the results look far more attractive. This would result in its price to operating cash flow multiple contracting to 39.3. Its EV to EBITDA multiple would decline to 26.7 over the same period of time. Again, these figures are not particularly cheap, before an industry leader that is capable of generating significant cash flow, it's not bad.

Takeaway

Operationally, I'm very bullish on GoodRx. I believe the company has a superb business model, and I believe that its prospects in the long run are great. The company delivers true value to its users, while creating value for its investors. That's a big plus in my book as well. This does not mean that I think investors should rush out to buy the stock though. Shares are expensive. This could lead to extreme volatility, particularly as time goes on. Having said that though, the company will eventually grow into this value, and at that time I suspect it will be priced higher than it is today. For those who are patient and don't mind riding out that volatility, GoodRx could be a good play to go with. But a more sensible approach might be to wait for a drop or wait for it to grow into its price. At that point, it will be a much more solid prospect.

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.