SelectQuote Inc. [NYSE: SLQT] offers a direct-to-consumer (DTC) distribution platform that employs a technology-based approach to connect policy-buyers to online agents that can help them compare quotes and policies.
In other words, it offers a platform that allows consumers to compare insurance policies from a curated panel of insurance carriers for complex senior health, life and auto, and home insurance policies.
The company generates its revenues by selling insurance products on behalf of the insurance carrier partners in the form of commission. It functions through three lines namely:
- SelectQuote Senior (its largest and fastest-growing business),
- SelectQuote Life, and
- SelectQuote Auto & Home.
The Overland Park, Kansas-based technology-enabled insurance brokerage serves as a trusted resource, helping people find the right insurance at the best price by answering questions and sharing unbiased price comparisons from some of the country’s leading insurance companies.
The Bull Case for SelectQuote
As improved confidence in economic growth keeps pushing the market higher and higher, it is becoming increasingly hard to find a technology stock that seamlessly combines profitability, value and growth. Analysts feel that SelectQuote is a rare example of this that beautifully fits all these elements into one complete package.
This insurance technology company debuted on the stock market last year at $20 per share but, since then, the stock has failed to gain traction. A very interesting point to note here is that despite massive growth opportunity, and the fact that SelectQuote is gaining market share in a sector that is still heavily under-penetrated by technology, it is rather intriguing that SelectQuote trades away from the limelight at a rather cheap valuation.
The under-the-radar stock trading at a cheap value, as such, creates a profitable opening for savvy investors willing to stay invested in the company for a long term.
The insurance service provider draws its primary strength from the evolution being witnessed in the insurance-buying process. Earlier, insurance policies were generally purchased in a face-to-face meeting with the insurance agent, who laid a limited number of policies out on the table. The entire process put the buyers at a disadvantage, who, in absence of any clarity or transparency, often ended up buying whatever policies were recommended to them.
The internet has changed all that, and for the good. Now people do extensive research online, and compare different options available before settling for whatever looks the best choice. To put it bluntly, the old way doesn’t cut it anymore.
SelectQuote has kept pace with the changing times by employing a technology-based approach, which connects people interested in buying insurance with online agents that can help them compare quotes and policies from different insurance companies.
Right now, the company’s primary focus is on senior insurance (Medicare policies) and life insurance, though the technology currently being employed by SelectQuote can be expanded to cover many different categories in insurance.
SelectQuote’s revenue for the third quarter stood at $266.9 million, which was an 80% increase over revenue for the third quarter of fiscal year 2020 of $148.6 million. Net income for the third quarter of fiscal year 2021 was $36.5 million, an increase of $12.8 million in comparison to what the company generated in the same period a year ago.
Moving forward, the company expects revenue to be in the range of $920 million to $940 million for the full-year ending June 30.
Net income is expected to be in the range of $130 million to $138 million, whereas EBITDA is expected to be in the range of $225 million to $235 million.
The big driver behind SelectQuote’s growth was a solid jump in the number of Medicare Advantage policies submitted, which grew around 130% year-over-year.
Is SLQT A Buy?
Tremendous growth opportunity
In SelectQuote’s most recent quarter, the company grew overall revenue at more than 80% year over year. The growth was chiefly driven by its flagship Senior care business, which generates nearly 90% of its overall revenue.
Medicare enrollment is witnessing tremendous growth, both in number and complexity. SelectQuote notes that by the end of the year, nearly 27 million Americans will opt for Medicare Advantage. At the same time, the number of policy choices will expand by 20%.
The company stands to significantly benefit from these encouraging trends as the company’s website is easy to use and navigate, which makes it extremely easy to explore these options and compare different providers.
Cost-Efficient Business Model
Also, SelectQuote doesn’t employ field agents. It just earns commission by sending prospects a qualified lead. However, in a shift of policy, the company has started to employ field agents, whose job is to give callbacks to prospects.
This has served the company well by significantly increasing conversions. In fact, the number of agents has grown two-fold and productivity per agent has gone up by 8% year-over-year. The company currently has a market cap of over $4.80 billion.
The company is making an aggressive sales push but, apart from it, is also expanding into two tertiary insurance categories-life insurance and home/auto insurance. This will help the company grow its revenue which, until now, is mostly dependent on Medicare.
SelectQuote is growing at a heathy pace. What makes the company more enticing, apart from its fundamental strengths, is the stock’s attractive valuation. The stock trades at just 13.3x EV/FY22 expected adjusted EBITDA – a very modest multiple considering the pace at which the firm is growing.
Also, SelectQuote’s recent investments in lead-gen capabilities have led the company to spend significantly more on advertising.
SLQT Investment Thesis: The Bullish Summary
SelectQuote is one of the fastest-growing insurance technology companies, almost doubling its revenue year over year. A dominant platform for seniors’ insurance policies, the firm is also expanding into other insurance categories like home and life.
More importantly, SelectQuote is currently trading at a very attractive valuation, which offers investors a great opportunity to build up a long-term stake in SelectQuote.
The Bear Case for SelectQuote
Shares fell around 20% after SelectQuote reported a mixed earnings results for its most recent quarter.
The insurance platform reported net income of nearly $36.5 million (up 54%) on total revenues of nearly $267 million (up over 80% year over year) for the three months ended March 31. Revenue came above expectations whereas earnings missed the average estimate by analysts.
The insurance comparison platform went public last year and, since then, the stock has failed to gain much momentum. The company also expects its net income for the entire year to slide, though analysts feel it’s a minor blip, as the company is currently focusing on growth and expanding its product portfolio.
It seems SelectQuote is being discarded by investors. However, many analysts feel that there is little justification for this and its low valuation, given the company’s strong and stable growth rates. Also, some analysts are of the view that the firm also has exposure to other revenue streams, which are growing at a slower clip, thus keeping investors away.
To sum it up, the stock is undervalued, but SelectQuote’s strong growth rate, its dominance in senior insurance policies, expanding product portfolio, and growing addressable markets, makes it a good investment for the long haul.
SelectQuote Stock Price Forecast
Analysts’ forecasts for SelectQuote range from a low of $27.00 to a high of $38.00.
On average, they anticipate SelectQuote’s share price to reach $33.00 in the next year. This suggests a possible upside of around 55% from the stock’s current price.
Is SelectQuote Stock a Buy?
SelectQuote’s fiscal third-quarter results were a mixed bag. The company’s revenue grew at a whopping 80% year-over-over to $266.9 million, trouncing expectations of $262.5 million, though the EBITDA margins shrank a bit.
For an investor, SelectQuote offers a lucrative buying opportunity for the following reasons.
Market ripe for tech penetration: SelectQuote is growing at a rapid pace. The speed at which the online insurance marketplace is growing is representative of the fact that there is a huge market for the company to tap into, as people look towards more tech-friendly ways of buying senior care insurance policies.
SelectQuote is primarily known for its senior care (Medicare) policy coverage. The good news for the company is that, with the experience of the pandemic just behind them, seniors have become much more tech-savvy.
Forced to stay indoors, and most vulnerable to the virus, they taught themselves to become really familiar with e-commerce, videoconferencing, and other internet services. The knowledge and heightened willingness to spend time online means more seniors would buy Medicare policies through online marketplaces like SelectQuote.
Greater sales push: SelectQuote is in a fast growth mode. The company, until now, was not into hiring field agents (it actually just took the cut out of insurers’ revenue when it sent them a qualified lead). However, recently it has started hiring aggressively to market its senior policies.
It has been on an expansion spree, growing its pool of agents, whose job, in turn, is to give callbacks to prospects. This leads to high conversion rates, driving up an agent’s productivity.
Additionally, the company, apart from its senior care (Medicare) policy coverage (its primary business), is also expanding into insurance and home/auto insurance, to drive up its revenue.
Growing Medicare enrollment: SelectQuote notes that, by the end of the year, Medicare Advantage enrollment will expand to 27 million Americans, while the number of policy choices is likely to witness around 20% increase.
SelectQuote is likely to reap rich dividends from such encouraging numbers, as its website is tidy, user-friendly and easy to navigate, making it extremely easy for people to explore different options and compare different providers.
SelectQuote’s cheaper valuation, in addition to a host of tailwinds likely to benefit the company, makes it a definite bargain stock. For the upcoming fiscal year (which will end in June 2022), analysts expect the firm to generate $1.28 billion in revenue, representing 37% year-over-year growth over FY21 revenue consensus of $934.9 million. SelectQuote expects the full-year revenue to be between $920 to $940 million.
SelectQuote’s CEO, Tim Danker, noted especially strong momentum with policy sales, greatly driven by the increased number of reps the company recently hired to support open enrollment.
Danker was right in claiming that agent productivity increased, but the market seems to have given a thumbs down to the firm’s shrinking EBITDA margin, which declined 6% in the third-quarter. The reason for it was the company’s increasing focus on policy growth, with the number of approved policies rising 127% to 464.6k. However, the actual revenue that the company is generating per policy declined slightly, dragging down the profit with it.
However, analysts feel that the company is fully capable of taking care of this minor problem. The firm is expanding rapidly, and the company went all out, hiring agents to take advantage of the open enrollment period. Agents/reps will take time to be fully productive, and once they reach their full potential, they can deliver more policies and revenue per head. In fact, agent productivity grew 17% in Q3.
All in all, the recent dip in stock price offers a major opportunity to invest in a quickly growing, tech-enabled insurance firm with strong growth rates and fast-growing market share. Good news definitely for long-term investors.
SelectQuote Enjoyed Halo Effect From EverQuote
SelectQuote went public last year in May . At that time, investors were very keen on EverQuote [EVER] – another online insurance marketplace that specializes primarily in auto insurance. The love affair with online insurance platforms seemed to have rubbed on to SelectQuote as well with shares shooting up right out of the gate.
However, SelectQuote has struggled to gain much traction since then despite incredibly strong results and solid growth rate. Incredible as it may sound, the needle has not moved much for SelectQuote with the shares still hovering around the $20 price level at which it went public.
SelectQuote’s under-valuation, nevertheless, has failed to disturb many analysts who believe it is the right time to invest in the stock given the fact that the company is firing on all cylinders and the stock price is grossly undervalued.
The company is enormously benefitting from its largest segment—senior insurance, as seniors become digitally savvy and more comfortable with purchasing insurance policies online. The company is also aggressively pushing sales by hiring new field agents for giving callbacks to prospects. It is also expanding into other categories such as home and auto insurance.
SelectQuote recently announced that it is joining S&P SmallCap 600 Index. The S&P SmallCap 600 covers U.S. small-cap stocks with market capitalizations ranging from $700 million to $3.2 billion at the time the company is added to the index.
Shares jumped more than 10% post the announcement as being added to an index results in greater visibility for the stock.
The firm also recently announced introduction of Population Health, its new healthcare services company, which will focus on providing seniors with an actively managed, high-touch consumer journey focused on improving medication adherence, health literacy and patient engagement.
“Value-Based Primary Care is an important part of our strategy to assist seniors with their healthcare literacy and to more closely align with our carrier partners to provide the best possible outcomes,” said Tim Danker, Chief Executive Officer.
SLQT Stock Forecast: Conclusion
To sum it up, SelectQuote operates in a space which presents tremendous opportunities for continued technological disruption.
Add to that its strong growth, high EBITDA margin, fast-growing revenue, multiple categories of insurance to expand into and, most importantly, a compelling valuation, and it becomes crystal clear why it is the most opportune time to buy the stock.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.