GoodRX (NASDAQ:GDRX) tracks prescription drug prices and its model was so successful that it soared after its 2020 IPO, fetching $46 per share on its first day of trading after having been initially priced at $33.
The intervening years, however, haven’t been kind to GoodRX. With the stock now priced at under $5 per share, investors who bought early and held onto GDRX have lost the vast majority of their initial investments.
Will GoodRX stock bounce back, or is it still best to stay away from this business?
Why Is GoodRX Down So Much?
The largest component of GDRX’s selloff appears to have been an unsustainable valuation. At the end of last year, shares of GoodRX were trading at a P/E ratio of over 115, even though they were already down considerably from their 2020-21 era highs.
While the shares may not exactly look cheap today, the current P/E is just a bit over half of that level. In some ways, GoodRX is a classic example of a stock that was bid up on massive growth expectations and then deflated when those expectations proved unrealistic.
Does GoodRX Have Catalysts for a Recovery?
Needless to say, GoodRX’s history of losses doesn’t inherently rule out the possibility that the stock could start rising from here if the business’s fundamentals improve.
One catalyst GoodRX bulls are currently focusing on is the introduction of a subscription service for popular ED medications. GoodRX already has a large user base that can be converted to paid subscription plans like this one, creating an opportunity for the business to monetize in new ways.
Some bulls also point to the recent cuts made to government insurance programs as a potential boon for GoodRX. With more people seeking affordable healthcare alternatives, innovative businesses like GoodRX could thrive in a market less dominated by Medicaid.
While there’s certainly an argument to be made that GoodRX could benefit from these changes, it’s still too early to tell whether and to what extent these benefits will materialize.
GoodRX has delivered a decent streak of revenue growth that has now spanned six quarters. Though the growth rate has been in single-digit territory throughout this period, the fact that revenues are growing again is a welcome change from the revenue contraction GoodRX experienced throughout much of 2022 and 2023.
Management is also allocating significant amounts of capital to share buybacks, a program that seems quite likely to put at least some upward pressure on GDRX.
As of the end of Q1, GoodRX still had a share repurchase authorization of $189 million. Given its $1.7 billion market cap, this amounts to more than 10 percent of the total capitalization of the business. In Q1 alone, GoodRX repurchased over $100 million worth of its own shares.
GoodRX’s Remaining Challenges
Despite some bright spots, there still appear to be plenty of headwinds facing GoodRX. Among these is the fact that the business has struggled to drive earnings growth from its recent streak of revenue growth.
Earnings per share have been largely flat through the last four quarters, and GoodRX’s profitability metrics remain lackluster. On a trailing 12-month basis, the business has only been able to deliver a net margin of 3.6 percent and a return on invested capital of 2.3 percent.
GoodRX has also struggled to really take off, instead delivering only modest revenue growth rates that may not give the stock much upward momentum.
In Q1, revenue only increased by 3 percent year-over-year. Management’s guidance for FY2025 doesn’t look much better, with yearly revenue growth of 2-6 percent expected.
What About Valuation?
GoodRX still commands a bit of a premium price. The stock trades at 59.4x earnings, though its price-to-sales ratio of 2.3 is considerably more reasonable.
Likewise, the price-to-cash flow ratio of 23.1 is on the high side. On the whole, GoodRX is priced at a level that implies significant future growth and which could set the stock up for further losses if the business can’t deliver that growth going forward.
With that said, it’s worth noting that analysts remain broadly bullish on GDRX. Analyst target prices range from $4 to $9, with an average of $6.32.
At that average, GoodRX would deliver a return of almost 33 percent in the next 12 months. At the time of this writing, GoodRX held 7 buy ratings, 7 hold ratings and no sell ratings.
That bullishness on the part of analysts, though, hasn’t translated well to institutional investors. Institutional selling has massively outpaced buying since December of last year, reflecting lower confidence in the business on Wall Street.
In the last six months, institutions have sold about $1.3 billion worth of GoodRX while buying a comparatively small $324 million. Judging by this disparity, institutional investors don’t seem to believe that GoodRX is undervalued or even fairly valued.
Is GoodRX Primed for a Recovery?
Right now, there are a few positives shaping up at GoodRx. The rollout of subscription-based plans could give the business a valuable new way to create cash flow, while the modest but consistent revenue growth it has produced over the last year and a half provides evidence of improving execution on management’s part.
The high rate of share buybacks is also quite positive, as it represents a direct way for the business to return cash to shareholders and create value for those who have continued to hold GDRX.
Low revenue growth rates and limited profitability alongside a valuation that’s still quite high sets the stock up for further selloffs so it’s a case of buyer beware still.
The reality is GoodRX’s fundamentals may not have improved enough to entice investors to buy at current prices.
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.