Image: Many speculative areas have faced tremendous pressure in recent months from new issues to entities tied to the trend of disruptive innovation. Image Source: TradingView.

By Valuentum Analysts

The past year or so hasn’t been kind to companies tied to the theme of disruptive innovation. New issues such as Snowflake (SNOW), Zoom Video Communications, Inc. (ZM), and Palantir Technologies Inc. (PLTR) have also had a rough go at it of late. For example, the Renaissance IPO ETF (IPO) has fallen almost 20% since late September 2020, while the ARK Innovation ETF (ARKK) has fallen almost 30%. GoodRx Holdings, Inc. (GDRX) is one of those companies that hasn’t performed as well.

We first wrote up GoodRx Holdings, Inc. in December 2020, “GoodRx Has Potential Capital Appreciation Upside But Long-Term Threats Loom,” and we encourage readers to have a look at that work prior to reading our update in this note. For some background, GoodRx is a disrupter in the U.S. pharmacy space, and its digitally oriented prescription drug pricing platforms generate strong operating income and an impressive cash flow profile. The company benefits from a network effect, has a solid balance sheet, and considerable opportunities to expand into adjacent business lines.

However, GoodRx Holdings is not immune to competitive threats, especially those from Amazon (AMZN)--which is making inroads into the online pharmacy arena--and its stock price will be highly volatile as the market sizes up its long-term potential. One of the key takeaways from our December 2020 note on GDRX was the following:

Investors seeking speculative capital appreciation upside should keep GoodRx on their radar, though for long-term investors, we caution that competitive threats from tech giants like Amazon always need to be kept in mind.”

Right now, GDRX is the type of company that the market loves to hate, and today, we’re reiterating our cautious take on the firm for long-term investors.  

GoodRx’s Modest Q4 Miss, Slowing Revenue Growth Expectations

GoodRx’s fourth-quarter 2021 results, released February 28, 2022, were a setback. On the surface, it wasn’t all that bad, with the company posting nearly 39% top-line growth on a year-over-year basis and non-GAAP earnings per share of $0.09 in the quarter. However, both measures missed the consensus estimate and they likely missed whisper numbers by a huge margin, given the stock’s reaction following the print. In this kind of market, where ‘growth’ is being punished severely, even small misses can pummel a stock with huge ‘built-in’ expectations, and that’s what we’re seeing, in part, with GDRX stock price drop.

During the fourth quarter of 2021, GoodRx posted adjusted net income of $40.5 million and adjusted EBITDA of $62.3 million, both measures up in the mid-20%s from last year’s quarter. Cash flow from operations also expanded nicely, more than tripling to nearly $50 million on a year-over-year basis in the final quarter of the year. For all of 2021, GDRX hauled in $178.8 million in cash flow from operations (up 36% from 2020), as it spent a very modest $4.6 million on capex, significantly lower than 2020 levels of $20.6 million. Free cash flow soared to $174.2 million from $110.8 million, a 57% year-over-year advance in 2021.

GoodRx’s balance sheet also remains quite healthy, with cash and cash equivalents totaling $941.1 million at the end of 2021, and debt standing at $655.9 million—good for a net cash position of $285.3 million. The company’s free cash flow profile and balance sheet continue to look very good, in our view, and its top line continues to grow at a fantastic pace.

However, in GDRX’s guidance for 2022, the company is calling for revenue growth of ~23% and an adjusted EBITDA margin in the range of 31%-33%. The expected top-line growth is considerably slower than the 39% top-line leap in 2021 (and well below the consensus expectations of 36% for 2022). GDRX’s guided adjusted EBITDA profit range for 2022 is only modestly better than 2021 levels (30.8%), and one that is still materially lower than results achieved in 2020 (36.9%).

GoodRx Faces Uphill Battle with Strong Competition in the Long Run

GoodRx has a huge opportunity in the massive $4 trillion U.S. healthcare market, with the company noting that it sees its addressable market (‘TAM’) standing in the hundreds of billions. We don’t disagree that there’s a lot of growth to be had out there with its business model, but the company’s expected slowdown in top line performance and shrinking EBITDA margin relative to just a couple years ago means its business model is facing material competitive pressures, in our view.

With GoodRx’s stock price drop in recent months, the market has clearly reset its expectations for the company lower. No longer is the market expecting top-line growth in the high 30% range in the coming years, but rather the low-to-mid 20% range, and the earnings leverage inherent to GDRX’s business model may not be as attractive given that EBITDA margins continue to hover below years’ ago levels. GoodRx is still putting up GAAP losses--with the add-back of stock based comp as the primary driver behind positive operating cash flow, and its balance sheet, while holding a net cash profile, still retains a sizable debt position.

Concluding Thoughts

GoodRx reported weak fourth-quarter 2021 results and issued top-line guidance for 2022 that has reset the market’s long-term growth expectations for the firm much lower. The company’s EBITDA margin outlook also speaks to continued competitive pressures at the company that may only intensify with Amazon a key player in the online pharmacy space.

Though GDRX’s free cash flow profile and balance sheet remain healthy, the company’s little to no expected GAAP profits in the near term, slowing expected revenue growth for 2022, and mounting competition speak to an uphill battle ahead. GDRX’s recently announced $250 million stock buyback program will eat into its healthy balance sheet and may only provide a dead-cat bounce from today’s levels (in the mid-teens per share). We remain cautious.

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Tickerized for GDRX, AMZN, SNOW, ZM, PLTR, IPO, ARKK, TXMD, GOCO, DASH, ABC, CAH, CVS, KR, MCK, RAD, TDOC, TGT, WBA, WMT

Disclosure: Callum Turcan owns shares in FB and XLE and is long call options on FB and XLE. Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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