GoodRx Investment Thesis: 57% CAGR, 96% Margins

GoodRx Holdings, Inc. [NASDAQ: GDRX] is one of the largest prescription drug pricing comparison platforms in America, which provides a convenient and user-friendly real-time market-intelligence platform to find and compare drug prices.

The company owns and operates a telemedicine platform and a free-to-use website and mobile app that gather current prices, savings tips, and discounts offered by pharmacies and, subsequently, passes on the price information to consumers in the United States. 

It also provides pharmacy coupons to customers as well as offers tips on slashing drug prices. GoodRx aggregates and analyzes pricing data from more than 75,000 pharmacies across the U.S. and helps users find the cheapest option for the medication they’re seeking.

The company claims 18 million people visit GoodRx every month to learn about and save on their healthcare.

Customers download the company’s app or go on their website and type in their medication and GoodRx directs them towards pharmacies where they can get the drug at the absolute lowest price. GoodRx also allows individuals to consult with a doctor online and obtain a prescription for certain types of medications, regardless of insurance status. Also, with GoodRx, consumers can find at-home lab tests or tests at a service center in their area.

GoodRx was founded in Santa Monica, California in 2011 by Trevor Bezdek and former Facebook executives, Doug Hirsch and Scott Marlette. The company has an interesting story behind its beginnings.

The founder went with his prescription to a local pharmacy where he was quoted $450. He thought the amount to be too high, so he just started to shop around. He found that, depending on what pharmacy he went to, there was wild fluctuation in prices. He was really unnerved with all the opaqueness involved, and so he built GoodRx from the ground up to really bring pricing transparency to the market.

The Bull Case for GoodRx

GoodRx had a really good public debut, and has been delivering good results since then.

Total revenue for the fourth-quarter of 2020 grew 35.5 % year over year to a record $153.5 million, with prescription transactions revenue growing 26%, even with headwinds from Covid-19 and a weak cold and flu season.

Adjusted net income was up 40% to $32.2 million, or $0.08 per share, as compared to $23 million, or $0.06 per share, in the fourth quarter in the previous year.

GoodRx’s strong revenue growth in the fourth quarter was driven primarily by higher prescription transaction volume.  The company’s Q4 prescription transaction revenue grew 26% year over year to $131.3 million, driven by a 32% year-over-year increase in its monthly active consumers.

The company noted the increase in its prescription transaction revenue, which could have been even higher, but for a very weak cold and flu season. And as for the number of active users, it grew to 5.6 million in Q4.

Other streams of revenue ascended 153% year over year to $22.2 million. GoodRx now anticipates revenue for the first quarter of 2021 to fall between $158 million and $161 million.

The company also expects that the full year 2021 revenue will fall between $735 million and $755 million, an increase of around 35%. 

The gradual opening up of the economy will serve as a tailwind for the company as physician visits will bounce back. Overall, GoodRx is growing the top line fast, has strong margins, and is profitable with huge opportunities ahead.

For the past few years, GoodRx has consistently been one of the most downloaded medical apps on Google Play, with an average score of 4.8 out of 5 from over 700,000 reviews.

The company helps Americans get medicines at discounted prices from pharmacies – serving both, those without health insurance and those who are insured but may not be able to afford their co-pays.

GoodRx Has Highly Loyal Customer Base

It’s a business growing at a solid pace given the fact that its website gets as many as 18 million visitors per month. The best thing is that more than 80% of purchases on the platform are from repeat customers. The company’s business is highly recurring in nature, and with every purchase, GoodRx is automatically set for a commission.

Customers who download its free app can save up to 70% on their prescriptions. It makes bulk of its money by taking a 15% commission from the pharmacies it refers its customers to. 

A few years ago, GoodRx launched something called GoodRx Gold subscriptions. That’s where subscribers can pay a modest monthly fee of between $6 and $10, and gain access to more than 1,000 prescriptions for less than $10.

It also has annual Kroger Rx Savings Club subscriptions in place where patients can gain access to over 100 generic medications for $6 or less (some are free) at the supermarket chain’s pharmacies.

Additionally, they can obtain discounts on over 1,000 drugs. The company is also making inroads into the telehealth space. A lot of people in need of medicine may not have a doctor to write a prescription for them. So, what they can do is to go to GoodRx’s platform and use their telehealth product called HeyDoctor to speak with a physician and actually get a prescription.

The company is building out other business lines for itself. It is also expanding into telemedicine, where it compares prices for virtual consultations and offers the lowest one to its customers. The good news is that there appears to be a lot of potential in each as future drivers of revenue growth.

And coming to the most important point, some experts feel that the Amazon threat is overblown. Amazon launched Amazon Pharmacy and PrimeRx discount card in November. Even more recently, Amazon announced it will roll out a telehealth offering to employees and other employers.

Many believe that the major hurdle Amazon is likely to face will be to go through Google. In other words, when a user types “cheap drug prices” or a similar search term in the Google search box, in all probability, Google will send that person to GoodRx’s site as the leading organic result on Google’s SERPs. Amazon could find it hard to score above Good Rx in organic ranking if it competes for the same keyword phrase.

Lastly, it cannot be ignored that Amazon is a vast steamroller, which usually does not dip its hands in a business unlikely to move the needle. The fact that it is trying to emulate the GoodRx business model, attests to the fact that GoodRx is on a solid ground.

The Bear Case for GoodRx

GoodRx Holdings made a successful IPO debut in September of 2000, raising just under $1 billion at the IPO at $33. Today, it has a market cap of close to $16 billion.

However, things have not been as smooth as initially hoped, with the stock diving more than 13%, as Amazon announced new initiatives that seemingly intrude on GoodRx’s space.

Although, there is no dearth of growth opportunities for the company, it would be wrong to say that it does not face any risk or challenges from anywhere.

The biggest threat undoubtedly comes from e-commerce giant Amazon [NASDAQ: AMZN], which recently launched its pharmacy business, with the Seattle, Washington-based company having made its interest well-known in healthcare.

Here, we explore if the rewards that investors can reap from this healthcare company outstrip the potential risks, and whether GoodRx is a good buy. We will also see how well it is doing, what are its flaws and, most importantly, the level of threat it faces from Amazon.

Is GoodRx Stock Overvalued?

To better comprehend if the stock is overpriced or rightly priced, we need to compare it with other high-growth healthcare stocks, in this case Teladoc (TDOC) and American Well. And since not all of the companies are posting consistent profits, we need to employ forward price-to-sales (P/S) ratio to compare their valuations based on future sales.

P/S ratio is a formula used to measure the total value that investors place on the company in comparison to the total revenue generated by the business. It is calculated by dividing the company’s market capitalization by the revenue in the past twelve months.

For GoodRx stock, investors are currently paying 23 times its future sales, which is more or less the same as Amwell and Teladoc.

GoodRx, as such, in comparison to its peers, doesn’t look to be too expensive.

The best thing about GoodRx is that it is profitable with healthy profit margins. However, with tech giants like Amazon posing a serious challenge to its business, investors’ concerns that GoodRx should be trading at more of a discount looks very much legitimate.

Amazon Is A Serious Threat To GoodRx

GoodRx’s business has been growing at a healthy pace, but the stellar performance is not amply reflected in its share price. And the reason for it is pretty obvious. 

On Nov. 17, 2020, tech giant Amazon formally introduced Amazon Pharmacy.  Customers can buy medicines online, and if they are Prime members, they can get their orders delivered within two days and save up to 80% if they don’t have insurance coverage.

The extent of the threat can be gauged from the fact that GoodRx Co-CEO Doug Hirsch had to issue a statement to soothe frayed nerves, where he stated that the tech giant is a pharmacy while his company acts as a marketplace.

And while it’s true to an extent that Amazon doesn’t offer the same service as GoodRx in connecting consumers with affordable and convenient prescriptions and medical care, the e-commerce titan still has the resources and the financial firepower to undercut them.

In all likelihood, a customer could stop using GoodRx’s app, if he finds he can get the best deals on prescriptions at Amazon.

GoodRx, as of now, is still ahead, thanks to the deals it has in place with pharmacy benefits managers, which offer it a little breathing space. But, then, Amazon is the elephant in the room, which means investors cannot ignore the risk that it poses.

Should You Buy GoodRx Stock?

GoodRx, no doubt, is growing at an impressive pace.  But, given its incredible size and capabilities, Amazon could cause more damage to GoodRx than a hedgehog in a balloon shop. 

No one is sure how seriously it is taking its healthcare business, and what plans it has in store for future expansions, but GoodRx is sure to take a whipping if it manages to entice customers with better solutions in the future.

Investment in GoodRx, with its current valuation and Amazon visible in the rearview mirrors, could be akin to catching a falling knife.

GoodRx Stock Price Forecast

Analysts’ 12-month price targets for GoodRx’s shares range from a low of $35.00 to a high of $70.00.

On average, they anticipate GoodRx’s stock price to reach $52.36 in the next year. This suggests a possible upside of just over 27% from the stock’s current price.

Is GoodRx Stock a Buy?

The Covid pandemic impacted pharmaceutical drug discounter GoodRx Holding’s growth to a certain extent. This is easy to understand because if patients are not visiting their doctors, there aren’t going to be any prescriptions, and, as such, no need for drug discounts.

The need to maintain social distancing because of the pandemic also blunted the flu season, which, in turn, further eroded the need for medications. However, the company’s revenue for the quarter topped expectations, which encouraged the management to offer a positive guidance for the coming quarter and year.

It expects 30% year-over-year revenue growth in the first quarter of 2021. And for the year, it expects revenue of $735 million to $755 million, which represents 30% to 32% growth from 2020.

With forecasts of double-digit growth and diminishing non-recurring expenses going forward, GoodRx looks all set for profitable growth opportunities in coming years. However, what can make investors wary of this stock is its high valuation.

The stock still trades around 21 times forward sales, which is generally considered to be on the higher side of the price spectrum. 

Potential investors, as such, need to carry out a careful assessment to decide whether a 30% growth rate warrants that kind of premium valuation.

To sum it up, the stock may not be an “absolute” bargain, relative to the market and technology stocks, but it possesses the potential to offer good ROI given the unique blend of profit and growth.

GoodRx Investment Thesis Conclusion

The $3.5 trillion US healthcare industry is ripe for disruption, and it is where companies like GoodRx can make their presence felt by using technology to bring efficiency and cost savings to their consumers. In fact, GoodRx has been one of the most popular medical apps for the past three years, generating around 15 million monthly users between its app and website.

Experts believe that healthcare is one of the most convoluted and confusing sectors, and things become even more complicated when you get down to the pharmaceutical industry. On the surface though, things look pretty much uncomplicated. You get a prescription from your doctor, take the script to the pharmacy, pay for the drugs and take it home. However, the reality is that there are tons of moving parts behind the curtain of this process.

Majority of Americans are unaware of the fact that drug prices are not regulated in the US, which means drugs can cost less or more depending upon from where you buy it. Also, the lengthy supply chain adds an extra layer of cost to many consumers.

This is where GoodRx significantly brings down costs for customers by enabling them to find pharmacies where they can get their medicines at the lowest price. It is just like purchasing a car by comparing prices at different dealerships.

The more the number of users, the more leverage the company enjoys which allows it to better negotiate drug prices. The better prices draw more users to its website and app, and the cycle feeds itself.

Coming to financials, GoodRx has grown its revenues at a CAGR of over 57% for the past several years, while gross margins have been an amazing 96%. More importantly, the company is profitable despite being relatively young.  The balance with a net positive cash position of over $300 million offers the company the leeway to further expand and build out its new business segments.

With a user base of 5.6 million MAU (monthly active users), GoodRx has been wising up to new methods of monetization such as GoodRx Gold and GoodRx Care. The US healthcare market is simply gigantic, and with revenues at just $550 million, the runway ahead is simply astounding.

Political threat, and threat from Amazon

Modern businesses operating in a highly complex and dynamic business environment cannot imagine living without threats. In case of Good Rx, it has to contend with two major threats: Political threat and threat from Amazon.

The American healthcare system is bloated, and during every election there’s much hype about introducing measures that could bring some semblance of sanity to this inefficient system. GoodRx works by lowering costs of healthcare for patients.

Things can quickly turn into a nightmare for GoodRx if the government introduces uniform healthcare for all where every user pays the same amount of money for prescription drugs and other healthcare facilities. It could also be an existential level threat for GoodRx as such a measure would make it irrelevant overnight. This, however, looks far-fetched because the issue is far too divisive to gain enough momentum.

On top of that, industries in this sector have very deep pockets, and they can spend a truckload of money to lobby against it behind the scenes.

Amazon Threat Is Serious & Increasing

Amazon has been interested in the pharmacy business for quite some time, and it formally announced its pharmacy offerings in November 2020. No business, however large, can afford to take Amazon lightly, and this was the reason GoodRx stock got hammered on the day Amazon came out with its announcement. The threat from Amazon cannot be discounted, but Amazon’s current offering is unlikely to drive a nail into GoodRx’s coffin as yet.

Amazon is offering two services. The first service is called Amazon Pharmacy, where you upload your prescription and insurance information, and the medicines are delivered to the given address. It is just like any product that you buy on Amazon. This is not GoodRx’s core business, as it serves as a platform to offer low prices to consumers.

On the other hand, Amazon’s second service, Amazon PrimeRx, shares a lot of similarity with GoodRx, but, at this point, analysts feel that Amazon is more interested in its pharmacy business.

Also, GoodRx has a first mover advantage. Additionally, the healthcare sector is huge, which means both, Amazon and GoodRx, can co-exist without a “winner take most/all” scenario coming into play.

To wrap it up, GoodRx is a profitable, growing business that has come with a very good business model.  The stock is a bit under-appreciated at this stage probably because its business model is new, and also because of the perceived threat from Amazon.

The platform is attracting both, insured and uninsured consumers. The healthcare market is huge, which means there’s plenty of room for it to grow. Based on management’s guidance for the 2021 fiscal year, GoodRx is expected to generate approximately $750 million in revenue, an upswing of 35% in comparison to the previous year.

Given the company’s really strong margins (gross margin is at 96%) and large addressable market, the current valuation seems very reasonable.

All in all, a market cap of $16 billion and promising growth opportunities makes GoodRx a good stock to own. 

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