American Well Grows Converge Activity But Operating Losses Remain High

Summary

• American Well Corporation reported its Q3 2022 financial results on November 7, 2022.
• The firm provides telehealth solutions to healthcare industry participants.
• Revenue is growing only moderately while operating losses are high.
• I'm on Hold for American Well Corporation in the near term.
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Luis Alvarez

A Quick Take On American Well

American Well Corporation (NYSE:AMWL) reported its Q3 2022 financial results on November 7, 2022, beating revenue and EPS estimates.

The firm provides a telehealth platform for health system participants in the U.S. and overseas.

With its high operating losses and moderate revenue growth, I’m on Hold for American Well Corporation for the near term.

Company

Boston, Massachusetts-based American Well Corporation was founded to develop the Amwell Platform, a telehealth system that enables a wide variety of healthcare services to be delivered remotely.

Management is headed by Chairman and Co-CEO Ido Schoenberg, MD and president and Co-CEO Roy Schoenberg, MD, MPH.

Ido was previously co-founder of iMDSoft, and Roy was previously the founder of CareKey, an electronic health management software vendor.

The firm has clients among health systems, health insurance plans, employers and retailers.

The company’s primary offerings include:

• Telehealth

• Telestroke

• Telepsychiatry

• On-demand consultations

• Scheduled consultations

• Pre-packaged care modules & programs

• EHR Integration

• Converge with third-party and device integration support.

The firm works with large entities to embed its telehealth capabilities within their workflows and pursues new business via a direct sales force.

American Well Corporation’s Market & Competition

According to a 2020 market research report by MarketsandMarkets, the global market for telehealth software and services is expected to reach $55.6 billion by 2025, up from a forecast $25.4 billion in 2020.

This represents a strong CAGR of 16.9% from 2020 to 2025.

The main drivers for this expected growth are a sharp increase in monitoring of chronically ill and elderly patients and improved telehealth monitoring devices and connectivity.

Also, providers continue to offer an increased number of specialty services via remote means as they seek to improve care quality while increasing productivity and reducing costs.

Below is a chart showing the historical and projected growth rates in telehealth usage by global region:

Telehealth Market (MarketsAndMarkets)

Major competitive or other industry participants include:

• Doctor On Demand

• Teladoc Health (TDOC)

• MDLive

• Philips (PHG)

• Medtronic (MDT)

• GE Healthcare (GE)

• Cerner (CERN)

• Siemens Healthineers (OTCPK:SEMHF)

• GlobalMed

• Chiron Health

American Well Corporation’s Recent Financial Performance

• Total revenue by quarter has grown per the chart below:

Total Revenue (Seeking Alpha)

• Gross profit margin by quarter has trended higher in most quarters:

Gross Profit Margin (Seeking Alpha)

• Selling, G&A expenses as a percentage of total revenue by quarter have risen recently:

Selling, G&A % Of Revenue (Seeking Alpha)

• Operating income by quarter has worsened materially in recent periods:

Operating Income (Seeking Alpha)

• Earnings per share (Diluted) have also deteriorated recently:

Earnings Per Share (Seeking Alpha)

(All data in the above charts is GAAP.)

In the past 12 months, American Well Corporation’s stock price has fallen 15.9% vs. that of Teladoc, which has dropped 62%, as the chart below indicates:

52-Week Stock Price Comparison (Seeking Alpha)

Valuation And Other Metrics For American Well

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Teladoc; shown below is a comparison of their primary valuation metrics:

Metric [TTM]	Teladoc	American Well Corporation	Variance
Enterprise Value / Sales	2.3	2.1	-7.6%
Revenue Growth Rate	24.8%	12.6%	-49.3%
Net Income Margin	--%	-95.0%	--%
Operating Cash Flow	$206,950,000	-$201,300,000	--%
Metric [TTM]	Teladoc	American Well Corporation	Variance

Click to enlarge

(Source - Seeking Alpha.)

Commentary On American Well Corporation

In its last earnings call (Source - Seeking Alpha), covering Q3 2022’s results, management highlighted nearing the "finish line in the development of Converge," its new telehealth software system that combines health payers, employers, providers and innovative services.

The company has begun migrating interested customers to Converge and visits in Q3 were 16% of the firm’s entire system-wide activity.

Management noted "economic uncertainty" but said that they can present "both headwinds and tailwinds" for the company, without characterizing whether it expects to have a net benefit or not.

As to its financial results, revenue rose 11% year-over-year, while total visits were flat at around 1.4 million.

Management did not disclose any company retention rate metrics, so investors don’t have any visibility into its customer churn results.

Gross profit margin has dropped while SG&A expenses rose as a percentage of revenue.

The net result was extremely high operating losses for the quarter and no progress toward operating breakeven.

For the balance sheet, American Well Corporation ended the quarter with $581.6 million in cash, equivalents and short-term investments.

Over the trailing twelve months, free cash used was a very high $201.6 million, of which capital expenditures accounted for only $300,000. The company paid a hefty $65.6 million in stock-based compensation.

Looking ahead, management reaffirmed its previous revenue guidance for the full year, while raising its adjusted EBITDA guidance by $10 million to approximately negative $185 million.

Regarding valuation, the market is valuing AMWL at an EV/Sales multiple of around 2.1x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.2x on January 3, 2023, as the chart shows here:

SaaS Index EV / Next Twelve Months Multiple (Meritech Capital)

So, by comparison, American Well Corporation is currently valued by the market at a significant discount to the broader Meritech Capital Index, at least as of January 3, 2023.

The primary risk to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, which may accelerate new customer discounting, produce slower sales cycles and reduce its revenue growth trajectory.

American Well Corporation is valued by the market at nearly the same EV/Revenue multiple as Teladoc, so the company's valuation doesn’t seem unreasonable.

Notably, AMWL’s EV/Sales multiple [TTM] has fallen by 14% in the past twelve months, as the Seeking Alpha chart shows here:

Enterprise Value / Sales Multiple History (Seeking Alpha)

A potential upside catalyst to American Well Corporation stock could include a "short and shallow" downturn, reducing downward pressure on customer budgets as well as rekindling a potential for pent-up demand.

At this juncture, I view American Well Corporation as apparently fully valued. With its high operating losses and moderate revenue growth, I’m on Hold for American Well Corporation for the near term.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.