- Alignment Healthcare has seen a solid public debut.
- Investors like the focus on the senior segment and the right incentives behind the business model.
- I too, like all of this, although the relative valuation gap with established peers is what causes me to have a cautious stance now.
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Alignment Healthcare (NASDAQ:ALHC) has received a welcomed offering on the markets as shares have jumped quite a bit from the offer price, despite rocky conditions on the financial markets. Investors like the focus on the senior lifestyle and the focus on the right outcomes and incentives of the business model. While I appreciate the fundamentals of the company, heightened valuations vs. established peers make me a bit cautious here.
The name of the company gives a good clue what the company is about. The company is all about reinventing the future of senior health care. The company aims to support a ''senior lifestyle'' through a savvy combination of technology, personalized clinical care, and on-demand care and services.
The company was founded in 2013 and is based on a few large values including putting the senior first, supporting the doctor, usage of data and technology, and applying a ''serving'' heart. Misaligned incentives play a dominant role in terms of the misfunctioning of the system and hence the name of the company.
The company aims to tackle these problems with savvy usage of data, technology, engage directly, pro-activity stance and coordination, focus on value-based systems, and a culture of innovation. While all of this sounds highly attractive, in the end, it too has to strive for efficiencies amidst already high scrutiny on the medical budgets.
The potential target market is huge as there are more than 56 million people of the age of 65 or older in the US, as this percentage of 17% of the population is only growing given the existing demographic trends. In terms of spending, this number came in at $630 billion in 2019. A rising number of people in this age cohort, combined with inflation and other factors show that the target market could essentially double in the coming decade.
The company currently has 82,000 members enrolled in its program as this number has been increasing quite aggressively in recent years.
Offering & Valuation Thoughts
Alignment Healthcare's management and underwriters aimed to sell 27.2 million shares in a price range between $17 and $19 per share. The vast majority of these shares, some 21.7 million to be more precise, were offered by the company with the remainder sold by selling shareholders. With pricing taking place in the middle of the price range, the company raised $391 million in gross proceeds in connection to this offering.
A total share count of 182.7 million shares represents a market value of $3.29 billion at the offer price. If we include an existing net cash position of $63 million and the offer proceeds, I peg net cash holdings at around $400 million following the IPO. Adjusted for this, the enterprise value comes down to around $2.89 billion.
If we look at the actual financial numbers the following picture emerges: the company generated $757 million in sales in 2019 on which an operating loss of $29 million was reported. Revenues rose 27% to $959 million in 2020 as operating losses narrowed significantly to $5 million and change, marking some real operating leverage.
To see what the multiples are we first have to factor in the fact that shares have risen to $22 at the moment of writing, adding approximately $750 million in value to both the equity and enterprise valuation. Based on that move, I peg the enterprise value above $3.6 billion which works down to a 3.8 times sales multiple as earnings are non-existing of course.
If we look at the quarterly trends throughout 2020 trends are interesting. Revenues were up 23% in the first and second quarter, with revenue growth accelerating to 33% in the third quarter, to slow down to 28% in the fourth quarter. While growth was solid and not impacted by the pandemic, the medical costs in relation to revenues are quite a volatile item if we look through the quarterly numbers. Nonetheless, it feels safe to say that the business is running around a billion in sales with largely break-even results at this moment.
If we look at the prospects for Alignment Healthcare there are lots of moving parts. The first is that of (traditional) competitors such as Humana (HUM) and UnitedHealth (UNH), among others. With a market value of $54 billion, Humana trades at just 0.7 times sales, a revenue multiple in essence at just 20% of the multiple at which Alignment now trades, while Humana is solidly profitable. UnitedHealth is a giant with $257 billion in sales as it is valued at 1.4 times sales at a $360 billion equity valuation, at a huge discount compared to Alignment as well.
Besides the valuation, there are other risks including the fact that the company is losing money, rising healthcare costs limited the potential of the industry in the long run, as Covid-19 might actually hit near-term demand.
That said, I like the long-term potential and segment focus of the business. On the other hand, is the fact that the company is not profitable already and the valuations are very steep, and this is just partly offset by the revenue growth. Amidst all this, I am acting a bit cautious at these levels, certainly after shares have seen a 20-25% jump from the offer price, a move which has caused the valuation to become too much of a premium on top of the standalone valuation already.
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This article was written by
The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.As the leader of the investing group Value In Corporate Events they provide members with opportunities to capitalize on IPOs, mergers & acquisitions, earnings reports and changes in corporate capital allocation. Coverage includes 10 major events a month with an eye towards finding the best opportunities. Learn more.
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