GoHealth Carries Too Much Risk (NASDAQ:GOCO)

The Investment Thesis

GoHealth, Inc. (NASDAQ:GOCO) operates in the United States in the healthcare sector. Here, they offer customers the ability to browse their marketplace, which lists several different health insurance options. Their focus lies on digital healthcare, an industry which continues to grow year-after-year. Their platform takes help from machine learning software like AI to provide an even better experience for customers. This all trickles down to make it more efficient to find the perfect health insurance option for a person.

Even though GoHealth, Inc.’s management is confident in the product the company offers, I don’t share the same view right now. Since the expenses are becoming higher and the revenue streams decreasing, I wonder what possible bull case there could be. In the meantime, I will maintain a sell rating for GoHealth, Inc. until there is a clear turnaround happening.

Last Earnings Report Highlights

In the latest earnings report by GoHealth, there weren’t too many positives to be had. The revenues saw a decrease YoY of 37% and came in at $133 million. Given that the company is used by customers to locate the best healthcare option on their platform, they saw increased usage during 2021 when Covid-19 was still very much prevalent. As the Medicare Submitted Policies decreased 34% YoY, it brought the revenues down with it.

Moving over to the bottom line, GoHealth, Inc. had a net loss of $74 million, a 34% increase from a year before when they lost $55 million instead. This has me worried their current operating structure is not sustainable and will lead to continued losses.

Despite all these issues with a positive bottom line and decreasing growth, they have managed to have over $100 million in positive free cash flow so far in 2022. Which gives some light at the end of the tunnel at least.

GoHealth, Inc.’s management has remained rather optimistic about the outlook for the company. The CEO Vijay Kotte said, “We are making meaningful progress on our transformation through our strategic initiatives and diversification in Encompasses.”

Sector Outlook

GoHealth, Inc. is a platform where customers can browse through health insurance options and the company helps them make their choices. So, in a way, they are operating in the health insurance industry, but it doesn’t necessarily mean they will grow at the same pace as the industry is expected to.

Between 2021-2028, the health insurance market is expected to grow at an annual rate of 5.5%. Steady growth, as the industry leaders often can pass on costs to their customers and members as insurance, is by the vast majority seen as a necessity in society to have.

Looking at what GoHealth, Inc.’s management is saying about the market, they stay fast by the need of a product such as theirs: “The market is in need of unbiased third parties to help support the Medicare shopping and enrollment process.”

Competitors

Looking at the market the company is in, there are a lot of smaller and similar companies offering what GoHealth does. A marketplace where customers can browse through options of health insurance. Some places I think of straightaway would be InsureEdge, NextAgency, and Profida. They are much smaller companies than GoHealth, but as the space is new, taking the first spot is possible by most companies in my opinion.

I think there are potential risks from GoHealth losing market share to a lot of smaller companies as the space becomes more and more saturated. Besides the competing companies mentioned, there is indirect competition by the government, too, as they also offer a marketplace to browse health insurance. But investors think GoHealth has an edge, as they label themselves as an unbiased third-party option.

The Balance Sheet

Moving over to the GoHealth, Inc. balance sheet, I can immediately see that the company has managed to increase their cash position substantially, going from $84 million in 2021 to $215 million in 2022. Many thanks to the increased free cash the company has reported for 2022 so far.

The current portion of the debt shouldn’t be a problem for the company to pay down, as it’s just $5 million. The issue instead comes with the GoHealth, Inc.’s long-term debt. Here they have built up $660 million in debt. The current cash position can make a significant dent in this but won’t be sufficient. Instead, I think inventors will want to see the GoHealth, Inc. cash flow remain positive in order for the debt not to become an issue and force the company to more aggressively dilute shares.

Right now GoHealth, Inc. holds just above $2 billion in assets, which has not shifted too much YoY, just a small decrease. Almost half of the assets, however, are held in commissions receivable which are non-current. With the liabilities being around $1 billion, the ratio is currently quite good. The large amount of assets the company holds also means they are trading a fair bit under the book value per share of $36.

During the last few years, the cash flow has managed to remain positive for GoHealth, Inc., which I think is a big positive. But moving forward, I think it will be important to see an increase in order to pay back debt faster and fuel expansion more.

GoHealth, Inc.’s shares have been diluted slowly and steadily throughout the last years as well. I don’t see anything indicating that should stop anytime soon. I think the company is in need of cash to expand and develop their product and service further to gain market share. With that, I think share offerings will happen, which could put off investors.

Valuing The Company

Right now, I don’t think GoHealth will be able to be profitable anytime soon. Because of that, I am very hesitant to even make price targets since they aren’t based on anything. Instead, it’s just wishful thinking hoping the company can achieve something it has yet to do, a positive bottom line.

Looking at the price/sales right now, though, it’s only 0.11, which is very low. Generally speaking, anything under 1 is seen as a good buy. But I like to have the company have positive EPS before buying, as that usually translates to positive cash flow. In the long term, a good flow of free cash helps give back to the investors in the shape of either dividends or share buybacks.

Apart from the price/sales ratio or earnings/share, the return on capital the company has is not that great. In the last 12 months, it’s been around -7%. The return on assets isn’t much better, sitting at -12%. I am worried that GoHealth, Inc. is expanding too fast and not taking into account that perhaps they need a return as well. Like I mentioned with their earnings, the revenue decreased and the expenses increased. That isn’t a good formula, and it could quickly turn to disaster. Because of this, I think selling any shares of GoHealth, Inc. is the best course of action for investors to take.

Conclusion

GoHealth, Inc. offers what they believe to be a necessary product where customers can browse the many different health insurance options out there currently. But as GOCO has not seen a return on the investments they are making, it has hurt the bottom line. In the latest earnings report, GoHealth, Inc. had decreasing revenues and increasing expenses.

With the industry expected to grow heavily in the next several years, there is always the risk of bigger whales entering the space and taking market share from GoHealth. This creates a lot of risks around and investment into the company.

Given everything I have gone through, I don’t feel confident buying shares in GoHealth, Inc., or holding any, for that matter. Instead, I think the best thing to do is sell GoHealth, Inc. shares and hope for a turnaround before potentially going back in.