Progyny Stock Is Overvalued

Summary

• Progyny announced their Q4 2020 and Full Year 2020 results on February 24, 2021, where they beat on revenue estimates and were in-line with EPS estimates.
• For full year 2021, management provided guidance that Progyny will earn between $520M and $540M in revenues, which would be between 51%-57% year over year growth.
• We believe the fair value of Progyny stock is $56, which represents 4.53% downside from the current price. As a result, we have the stock rated as a SELL.

Market Opportunity

The prevalence of infertility is high and affects 1 in 8 couples in the United States. Infertility is more prevalent than diabetes (affecting 1 in 11 individuals) and asthma (affecting 1 in 13 individuals). The fertility rate is declining because more people are starting families later in life, millennial women are delaying having children due to their careers, the rise in nontraditional families, and the global pandemic seems to have postponed some people’s decision to have children. Further, as a result of the pandemic, 300,000 fewer babies are expected to be born in the United States in 2021 compared with last year. Besides this, there is limited insurance coverage for infertility (i.e.: Medicare and Medicaid). Only 19 states have mandated insurance coverage for infertility, and even the ones covering it, they have inadequate coverage. Finally, a small percentage of employers provide a benefit plan that addresses infertility costs, which can run up to $60,000 for a successful outcome. Even the employers who do provide a benefit plan, they are more concerned with using their funds to control expenses as opposed to optimizing outcomes for their employees. As a result, the vast majority of patients who undergo fertility treatment must pay for most or all of their care out-of-pocket, which is cost-prohibitive for many families and individuals.

There is a clear opportunity in this market which has grown at a CAGR of 10% from 2013-18 and is expected to grow more than the economy of the U.S. in the future. The market sits at $7+ billion today and has the ability to grow to $15 billion with improved access to care. Progyny estimates that the potential size of the U.S. fertility market is at least twice as large because this figure excludes those individuals who do not seek treatment for infertility. According to a recent study by Reproductive Medicine Associates of New York, approximately 50% of people suffering from infertility do not seek treatment. Furthermore, when comparing the U.S. to other countries, the percentage of babies born utilizing ART (Assisted reproductive technology) is less than 2% in the United States (where fertility treatment is not adequately covered), compared to approximately 10% in Denmark and 5% in Japan (where there is more public health funding for fertility treatment).

Progyny currently has 180 clients and approximately 2.7 million covered lives. Their addressable market consists of 8,000 potential clients and 69 million potential covered lives. Another opportunity is the fact that employer coverage is increasing. Currently, approximately 50% of large employers provide some type of fertility coverage, which is expected to increase to nearly 2/3rds by the end of 2022. Furthermore, since the company’s client base currently consists of employers such as Microsoft, Google, another catalyst for future growth consists of diversifying their client base to include the likes of universities, school systems, governments, and labor unions. Further, as their platform continues to expand, Progyny believes they can potentially expand their offering and expand their client base in the future.

Other macro catalysts are at play for Progyny which includes: 1) people starting families later in life, 2) growth in non-traditional paths to parenthood, 3) other health-related burdens which have impacted the ability to have children, 4) continued destigmatization of infertility, and 5) increased financial support from employers.

Superior Performance

Above is a one-year chart performance comparing the returns of Progyny (blue line), the NASDAQ (orange line), and the S&P 500 Health Care Sector (green line). We can see that Progyny has been able to clearly outperform both the NASDAQ benchmark as well as the S&P 500 Health Care Sector. Over the past year, Progyny has returned 146.67%, the NASDAQ returned 47.77%, and the S&P 500 Health Care Sector returned 22.14%. Now, past results are no indication of future results, however, we believe the superior performance of Progyny should be noted.

Valuation

We believe the fair value of Progyny stock is $56, which represents 4.53% downside from the current price. As a result, we have the stock rated as a SELL. We arrived at this price target using a Discounted EPS Model. We also used technical analysis in order to see the short to medium term sentiment for the stock, which we believe is currently BULLISH. Using a margin of safety of 11.10%, or our required rate of return, we believe Progyny shares would be a BUY at $49.

Weighted Average Cost of Capital (OTC:WACC)

We used the weighted average cost of capital (OTC:WACC) in order to determine our required rate of return. To calculate this metric, we used the following: Interest Expense, Short Term Debt, Long Term Debt, Income Tax Expense, Income Before Tax, Risk-Free Rate, Beta, Market Return, and Market Capitalization. Our calculation yielded a WACC of 11.10%. The calculation of the WACC is shown below.

Discounted EPS Model

Recommendation: SELL  Price Target: $56    Buy Price: $49

We used a Discounted EPS Model in order to determine our price target for Progyny stock. We used the EPS TTM of $0.47 and grew it at a rate of 21% over the next 5 years. We calculated this growth rate using the average of our projected growth rate in net income. We used our WACC of 11.10% for the discount rate. Further, we used a P/E Ratio of 85 in order to multiply by the year 5 EPS. Currently, the P/E ratio of Progyny sits at 104.36. We thought it made sense to decline this over time to 85, considering that Progyny’s business would head to the maturity phase. Our calculation led to a fair value calculation of $56.21, or $56 rounded downwards, which represents 4.53% downside from the current price. As a result, we have Progyny rated as a SELL. We were interested to see when Progyny would be a BUY; therefore, we used a margin of safety of 11.10%, or our WACC. This led to a price of $49.97; therefore, we believe that Progyny shares would be a BUY at $49.

Technical Analysis

Short/Medium Term Sentiment: BULLISH

Above is a 4-hour chart of PGNY. If we look at the medium term and short-term pattern, we can see that there has been lot of interest in the stock. The Volume is at or above the past 50-day volume average. Over the past few months, the stock has consistently been making new highs, which can be seen by the Higher- Lows pattern on the chart, which is a bullish stock pattern. Along with that, we can also notice critical levels, support and resistance lines on the chart which can be used to enter a position if we choose to. Having said that, the stock is volatile and seems to continue to move upside given that the overall market performs well. There is also a cup and handle pattern that seems very likely to happen in the near future looking at the chart. If we look at the chart carefully, the U-shaped, white-colored cup has already formed and if the stock pulls back to the $53.58 level, then we can see the handle forming too. After hitting that level, it can continue the pattern to the upside or continue moving downwards. Another scenario we can see is that the stock is consistently making new highs, which is indicated by the yellow arrow.

Above is a daily chart of PGNY. If we look at the chart, we see an Ascending Triangle pattern which is indicated by the white lines. This is a bullish stock pattern and recently the stock picked up momentum and broke the critical level of $50.18 which was also acting as a strong resistance to the stock. The second critical level that the stock broke recently was $53.58. The stock, as described earlier, is making Higher-Lows. There are two directions in which the stock can move in the near future, as indicated by the yellow arrows. The arrow coming down indicates the stock will look to form a cup and handle pattern and the arrow to the upside indicates strong upside price movement. In terms of the Exponential Moving Averages, it indicates upside movement in the near term. If we look at the RSI at the bottom, PGNY is currently at the 73.98 level which is considered overbought and therefore, there might be a pullback incoming for the stock.