GoodRx Stock: Strong Value Proposition Enables Long-Term Growth

Recommendation

My recommendation is to go long GoodRx Holdings (NASDAQ:GDRX). In a disjointed final market, GDRX stands out to me as a multi-faceted, multi-product platform that is already providing benefits to both consumers and its industry partners in the form of cost savings and increased convenience. While growth may slow in the near future, it should return to normal in the not-too-distant future.

Business

GDRX is a company that provides a telemedicine service and a website as part of its digital healthcare platform, which gives its customers access to quality medical care at a price they can afford.

US healthcare challenges

In 2021, the U.S. healthcare market cost $4.3 trillion, and projections show that number will rise to $6.2 trillion by 2028. Healthcare in the United States is a huge industry, but it is poorly understood by consumers. Finding a doctor you like and getting a prescription filled at a reasonable price are just two examples of the many healthcare tasks that can be frustratingly complicated. Because of this, the healthcare system and its patrons may experience unnecessary delays, inefficiencies, and higher costs. For many Americans, the pharmacy is the door to the healthcare system. The typical customer makes nearly twice as many trips to the pharmacy as they do to the doctor. There is an absence of transparent pricing, a complex reimbursement and health coverage landscape, and a splintered market, making it difficult to find reasonably priced prescriptions. Selling prices for a comparable medication can differ greatly between pharmacies. Those in need of medical attention may experience similar difficulties, including a lack of information about costs and lengthy waits to see a doctor.

For one thing, I don’t think there are enough consumer-oriented solutions out there to help people find what they’re looking for and get it quickly and cheaply.

In order to make healthcare more accessible, affordable, and efficient, the extremely complex healthcare market can benefit from the same kinds of technologies that have been used to aid consumers in other areas of their daily lives. In my opinion, consumer-focused digital solutions are more crucial in healthcare, where people’s lives and well-being are at stake, than in most other industries.

A large TAM

As people become more educated about healthcare options and price points, the industry is experiencing a paradigm shift. In my opinion, the American public would be better served if they were given the opportunity to make healthcare purchases using more data than ever before. How can we achieve this goal? By giving people access to a healthcare marketplace where they can research various options, make informed decisions, and make purchases according to their individual needs and wants, all while getting the best possible deal.

This market has a massive TAM. Based on projections from management, the TAM is pegged at around $554 billion. Among these are $30 billion in potential revenue for pharmaceutical manufacturer solutions, and a $524 billion opportunity for prescriptions.

GDRX value proposition

The GDRX platform facilitates better lives by making quality healthcare more accessible and affordable. I think the GDRX platform has the potential to improve medication adherence, speed up the healing process, and ultimately improve patient outcomes—all while lowering healthcare costs for consumers.

GDRX’s strength is that it raises the value of the entire supply chain, in my opinion. Those involved in the healthcare system as a whole stand to gain from increased medical adherence, which in turn improves patient outcomes and decreases the burden on overburdened hospitals and emergency rooms, as well as from expanded access to low-cost prescriptions that patients might not have filled otherwise and higher levels of consumer satisfaction. In my opinion, GDRX is beneficial for all parties involved. Because of this, positive and self-sustaining network effects may emerge.

GDRX is a trusted brand

Particularly in the medical field, I think a solid brand can give you an edge over the competition. In nearly a decade of product development, GDRX has established itself as a reliable brand name. In my opinion, GDRX’s 15+ million monthly visitors and high Net Promoter Score (3Q22) are excellent indicators of the quality of its brand and the value it provides to customers. The same applies to the supply side as well. More than 800,000 prescribers have used GDRX in the last two years, and 19 of the 20 largest pharmaceutical companies have purchased services from GDRX.

Scaled network

GDRX’s top-tier digital healthcare platform and brand have propelled explosive expansion (from $250 million in FY18 to $800 million in 3Q22 in revenue). Over 70,000 pharmacies accept GDRX codes and are part of the GDRC’s expansive network. The scale of this operation, in my opinion, is a major benefit. GDRX has been to boost the cost saving it offers customers as it has grown its user base and the number of healthcare providers it works with. This is in part because the company has been able to use its expanding customer base as a magnet to draw in new partners and negotiate lower prices. In addition, GDRX’s size allows for advanced data analytics, which in turn aids the company in continuously optimizing its platform for the benefit of its customers.

Telehealth is a way to expand GDRX TAM

GDRX’s platform is well-suited for entering the telehealth industry. Incorporating telehealth into the GDRX platform is a great idea that I think will boost user activity and satisfaction. Data from GDRX indicates that about 20% of users searching for medication on GDRX do so without a prescription. To improve prescription availability, GDRX has partnered with HeyDoctor and the GDRX Telehealth Marketplace to offer patients like these a fast, easy, and low-cost way to get a diagnosis and prescription online.

Recent updates

Several noteworthy items appeared in the earnings report for the 3Q22. Profit for the third quarter was about in line with projections, thanks to higher-than-expected results from prescription revenue and margins. But the 4Q commentary showed that the grocer issue, marketing investments that put pressure on margins, the impact of price increases on the number of people who cancel their subscriptions, and near-term headwinds related to pharma manufacturers’ solutions were all still problems. On the plus side, there is persistent optimism regarding the sizable savings-related market opportunities.

Valuation & model

Using consensus estimates, I believe GDRX is worth $6.67 in FY23. I agree with consensus that growth is likely to be muted in the near-term (i.e., FY23) given the weak macro backdrop, but this should be a “one-off” situation. I expect things to revert back to normal where GDRX continues to grow and capture share by disrupting the industry.

Profitability is another key thing to take note. Management has clearly set out a plan to driver profitability, which I expect to be successful given the good progress so far. I believe margins should eventually return to its normalized level.

Assuming GDRX continues to trade at the same valuation today (forward EBITDA), the stock is worth $6.67. However, if GDRX can surprise the market by bringing forward the normalization of profits, I think the stock could be worth much more as the market attaches a higher multiple.

Risks

Competition is a risk

Take-up rates may be threatened by newer, more convenient methods of drug delivery offered by companies like Amazon, Startups like SingleCare, and Walmart.

Regulation

At present, GDRX’s selling point is pharmacy price discrepancies. GDRX may be affected if generic drug prices are reduced or if there is greater price uniformity between pharmacies.

Summary

Despite being one of the largest sectors of the US economy, the US healthcare market remains opaque and highly fragmented for consumers. This can lead to confusion, inefficiency, and unneeded additional costs for consumers and the healthcare system. GDRX aims to tackle this issue by providing a healthcare platform that allows consumers to search a broad range of choices and offerings, discover what is best for them, transact based on their preferences, and receive the best price while doing so.