In this episode of Industry Focus: Wildcard, Jason Moser and Motley Fool analyst Brian Feroldi take a deep dive into the S-1 filing of an upcoming IPO in the fast-growing telemedicine space. They bring you details about the upcoming offering; they discuss the company's business model, finances, competitive landscape and how they are positioned within that, as well as competitive advantages, growth potential, corporate leadership, what potential investors must keep an eye on, and much more.

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This video was recorded on September 16, 2020.

Jason Moser: It's Wednesday, September 16. I'm your host Jason Moser. On this week's Wildcard episode, we're jumping into an S-1 in the healthcare space today. We're going to take a closer look at Amwell (NYSE: AMWL). And here to guide us through the pros and the cons, the ups and the downs, the bulls and the bears is Mr. Brian Feroldi. Brian, how's everything going?

Brian Feroldi: Jason, I Amwell; how are you?

Moser: [laughs] Ah, very clever. Did you plan that, Brian?

Feroldi: It's like I've been planning it all day, Jason. [laughs]

Moser: That was good, I didn't see it coming; I have to admit, so well played. [laughs] Well, folks, as I mentioned, we're going to be digging an up-and-coming IPO here in Amwell, formerly known as American Well. But Amwell is another player in this very popular and fast-growing telemedicine space. And so, we're going to take a look at the S-1 today and let Brian guide us through what the business does, how it makes its money, management, any competitive advantages, all that good stuff. So that when this thing does go public, you, our loyal and faithful listeners, will be fully ready to make a decision one way or the other. But, Brian, let's go ahead and kick this off here.

In regard to Amwell, first and foremost, give us a little bit on the history of the company and what it does?

Feroldi: Yeah, I've been looking forward to this S-1 for some time now. I myself am a Blue Cross Blue Shield healthcare plan holder, and I don't have access to Teladoc (NYSE:TDOC), but I do have access, and in fact I got a letter in the mail from them maybe two years ago about downloading Amwell so I could use that as my telehealth provider. So, I was like, huh! There is a Teladoc competitor out there. And its core, yes, that's the basic of what it is, it's the second leading provider of telehealth services, and they're essentially Teladoc's biggest rival.

This is a company that was founded in 2006 by two brothers who are still running the show to this day; we'll get into them a little bit later. They've grown substantially over the years, both organically, primarily, but also with acquisitions. They're going to be coming public, and as of right now, they're looking to sell about 35 million shares somewhere between $14 and $16. I'm sure that range is going to grow, especially given where [laughs] IPOs have been going recently. And they hope to net about $650 million. Prior to this, they had raised about $500 million, including $200 million in May of this year. They needed to go and get an extra capital raise there, just to keep up with the extreme demand that they're seeing in response to COVID-19. No surprise to see that demand for this kind of thing has taken off in response.

Moser: Yeah, I mean, it's no question that 2020 has been the year of the digital economy, among other things. And whether you are in telemedicine or signing [laughs] your documents digitally or developing an omnichannel retailer, the way business is being done has changed so significantly in such a short period of time, it does feel like a lot of these businesses, whether it's Teladoc Health or Amwell, I mean, they're not coming into this year, they're not coming into this stretch here, this pandemic economy, unprepared, right? I mean, they've been at it for a while, building these businesses. And Amwell, certainly, has already built up a very nice scale already with customers, with partners; I think I see here they have somewhere in the neighborhood of 55 health plans already; plenty of customers and plenty of room to grow there.

But talk a little bit about how they've grown the business today and then what you're looking forward to in the coming quarters and years.

Feroldi: Yeah. So, this is a company with scale. I mean, we're saying that they are the second biggest player in telehealth, and they have the numbers to, kind of, back that up. They have 2,000 hospital and healthcare systems that they're currently working with. The flagship one is the Cleveland Clinic but they do have partnerships with over 150 of the nation's largest health systems in their ecosystem. They have 5,000 multidisciplinary providers that offer coverage in 50 states and they have a total of 50,000 medical providers in their entire network. They have signed up 40,000 and growing employers, including the likes of some big names like Philips, Apple, Cerner. And through the first six months of the year, they connected 2.9 million visits; again, through the first six months of the year. That was up substantially.

And I always think it's good, helpful to have some comparisons here. So, Amwell, 2.9 million visits through the first-half of 2020. For comparison, last quarter Teladoc did 2.7 million visits. So, on that scale they're about half the size of Teladoc, and that's pre-merging with Livongo, so Teladoc numbers are [laughs] much higher. But similar numbers on the membership side, on the clinicians' side, Teladoc just seems to offer more subspecialties, they offer about 50, but they have similar numbers of clinicians in their network. So, comparable businesses, but Teladoc is doing about twice as many visits.

Moser: Yeah. And as someone who's followed Teladoc since they went public back in 2015, one of the things I've seen, we've all seen who follow the company, it's been an acquisitive company, right? Teladoc has made some acquisitions along the way, and then this merger with Livongo came around. And really, I think that's beyond an acquisition, I mean, that's really kind of a merger of two equals. I mean, that gave them, obviously, a great head start. We talk about scale, clearly Amwell is in a good spot when it comes to that scale. Clearly, also Teladoc Health is in a better spot, because they've been making those investments in that business, and Amwell has too. But do you suspect, do you feel like this is a business that once they go public and they have some more access to capital that way, do you feel like that consolidation, more acquisitions would be part of the strategy for Amwell also?

Feroldi: I think that's definitely going to be part of the strategy. I mean, Amwell has made two acquisitions already in its history. They acquired a company called Avizia in 2018; that bolstered them in the acute care market. Last year, they bought a company called Aligned Telehealth, which gave them a big presence in the telepsychiatry market. That's a strategy that we've seen Teladoc do over and over again, they've been extremely acquisitive with buying up to gain footholds in local markets or to build out their product offering. If Amwell wants to truly compete head-to-head against the likes of the Teladoc and Livongo, they're going to have to continue, they are almost going to have to continue to make acquisitions in order to remain competitive.

Moser: Yeah. I think you're right. And I mean, obviously going public, that's going to open them up to the opportunity to at least to gain access to capital to make deals like that. And so, that's always been, kind of, one of those things, I've kept in the back of my mind with Teladoc. I understand why they're doing that, but by the same token, you can't dismiss the fact that every acquisition you make is a risk, big or small, and they've made a couple of big ones before this Livongo merger, which is absolutely mammoth.

Let's talk a little bit about the business model, because I have a feeling these are very similar business models as well. How does Amwell make its money?

Feroldi: Yeah, very similar business model to Teladoc. So, they get recurring subscription fees from the companies that they sell to as well as the health partner plans. They also have usage-based clinical fees. So, whenever a meeting takes place on their network, they do collect some revenue from that. Interesting to note, they actually have another segment of their business where they get revenue from hardware and service fees and they rely on revenue from innovator partners. And one of the partners that they call out is Apple. Apple is undergoing a 400,000-patient heart study, I believe using their Apple Watch and Amwell is their partner of choice on there. By being their partner of choice, that does entitle them to some revenue share from Apple, and that's one of many partnerships that they have.

Amwell has done a really good job about offering software development kits [SDK] and APIs [Application Programming Interface] that actually integrate directly into other applications, such as electronic medical record systems. So, if you're a clinician and you're using whatever software you're using to run your practice, it's fairly easy to just add Amwell to that. So, it's inbuilt right into your software. That's something that I like to see. They did say that that part of their business is pretty small, less than 10% of revenue, but they plan to grow that substantially.

But the big takeaway for me here, Jason, is just like with Teladoc, they say that 84% of their revenue is recurring. Love to see that.

Moser: Yeah, that was the number that stood out to me. Yeah, you're right, you love to see that. That recurring revenue, I mean that's really the beauty of that SaaS business model, right? That subscription. And it's so reliable, and as an aside here, you know, I was going through a Gartner presentation here on Snowflake recently; obviously a different company in the data space, but it was interesting to see how Snowflake is taking a bit of a different approach. They don't have that subscription dynamic as much, there's a bit more variability, it's a consumption-based business model. I'm not sure I'm all that fond of that. It sounds like customers of Snowflake don't like it either from a price predictability standpoint, but for a company like Amwell or a company like Teladoc Health, seeing that recurring revenue, that subscription revenue; I mean, customers like it, the company likes it, investors like it; that's really a good thing to see.

And then the Apple relationship there I think is fascinating. And I don't know if you got to catch any of that Apple event yesterday, it was obviously sans any phone news. So, it was, sort of, lackluster from that perspective, but you could see, at the beginning with the focus on the watch and stuff, Apple is, they're taking more steps to play a big role in the healthcare space, which I just think is fascinating. And it wouldn't surprise me at all to see these telemedicine companies partnering up more and more with big tech as time goes on.

And if I'm not mistaken, am I right here, I think, did Google [Alphabet] note that they were going to make an investment in Amwell as it goes public as well?

Feroldi: Yes, Google has committed to making a $100 million investment in Amwell, which would actually make them a pretty decent sized shareholder. I forget the number; I think it's around 5%. But as part of that deal, Amwell gets to use the name Google, like Google is an investor in us. And they're making a commitment to host all their services on Google's Cloud platform. So, it's really a nice partnership on both sides.

And I like what you said before, Jason, about how Apple, at the Apple event, they clearly want to make healthcare a big deal. And they know that building healthcare into their products widens their moat and is a massive opportunity. I really like that they picked Amwell as their partner to kind of get their heart study done. I wouldn't be surprised if they opened that up to Teladoc down the road, but it is very interesting that they chose Amwell over Teladoc out of the gate.

Moser: Yeah. You know, I was thinking about that, and I guess I was thinking about it more from the Livongo perspective. Given Livongo's focus on chronic conditions, I mean, that would be a massive, pretty reliable, sort of, test base really. So, yeah, I think you're probably right, you probably see them open it up to bigger audiences. I mean, that's the whole idea, you know, the more data you get in regard to that stuff, the better decisions you could make.

Speaking of 84% recurring revenue. What do the revenue numbers for this company look like? When you get Teladoc Health getting ready to knock, they're going to bring in $1.2 billion, $1.3 billion here next year thanks to this acquisition, thanks to this merger. What do the revenue numbers look like for Amwell?

Feroldi: Not quite in that league yet, but trending in the right direction. So, this is a company, let's go back to 2019. For the full year, the full-year revenue was $149 million, that was up 30%. So, that was kind of their pre-COVID growth rate, COVID obviously caused their business to explode. I mean, they saw an 1,000% increase in the number of visits on their platform. In April of this year, for example, they hosted 40,000 visits per day. April of the prior year, 2,900 visits per day. So, you're talking about more than a 10X increase in the number of visits.

That's obviously done great things for their revenue. So, in the first-half, again "half" of 2020, revenue grew 77% to $122 million. What I found interesting is, during that period their net loss almost tripled to $113 million. Again, that's over a six-month period, but when you see that, clearly, they were caught off guard by COVID-19 and they were not prepared for a [laughs] 1,000% uptick in the demand for visits. Because of that huge uptick, they needed to tap the markets for cash, that's why we talked about the $200 million investment they made before. And interesting to me, not in a good way, was they lost $113 million, again, for the first-half of the year; $113 million. But their cash burn was about half that; $58 million.

This is a company that did $72 million in stock-based compensation during a six-month period prior to [laughs] coming IPO. So, if you don't like stock-based compensation, boy! You're not going to like Amwell.

Moser: [laughs] I'm glad that you mentioned that, because it's something that's easy to, kind of, gloss over I think for many, they see that and they think, well, it's not money, it's not cash, so it doesn't really matter. I mean, the fact of the matter is it does matter, and it's something you need to keep in mind. And whether you're a telemedicine company or -- I mean, I always go back to Twitter. Twitter is the one where I look, and I think you know what, when they came public and share-based compensation was just so extraordinarily high, because the company was mismanaged, there was no unified vision of what they were trying to do thanks to just, sort of, the rotating leadership positions there. But, you know, once Jack Dorsey came, and he made that one of his top priorities, you could see they brought that share-based compensation down from 40% of revenue to 30%, to 20%, to 15%, the market really did take note. The market does care about that stuff, and so it is certainly something to keep in mind. I mean, young businesses, they're going to have to resort to that, but that's certainly something to keep an eye on as they mature.

With a business like this, what kind of a competitive advantage do you feel like a business like this possesses today? You know, we understand it's a big player in that telemedicine space and really helping to, sort of, dictate new space there, but what are the other competitive advantages a business like this holds?

Feroldi: Sure. Before we go to the competitive advantages, I want to throw out a couple of the numbers on the financial side just to tee things up for our listeners. So, one thing that I took note of here was the gross margin. I always like looking at gross margin to see what kind of profitability could happen down the road. In the first half of the year, this company's gross margin fell from 48% to 36%. 36%, that was a huge decline. Now, a huge amount of that was because they had to ramp and invest so heavily into the platform and they took on a whole bunch of fees to kind of meet that 10X growth in demand. But 36% gross margin, while it's probably depressed right now, for comparison, Teladoc, over this last quarter, 62% gross margin. That was also down substantially over the prior quarter, but that's just on a different planet in terms of profitability between the two.

On the flip side, you could say, well, similar businesses, it's possible that as Amwell continues to grow, it could get its gross margin up into the Teladoc range. And boy! Would that be great to see, but that is something that I was actually really surprised at when I was going through this. And then the balance sheet, post-IPO, once this company comes public, they're going to have a very nice balance sheet. They plan on converting a lot of their convertible debt into shares. And the estimates are about $830 million in cash and no debt. So, they're going to have a really clean layout.

But let's talk about the competitive advantages here. I definitely see a couple. The first would be switching costs. Once a health plan, a company, a provider gets Amwell into their EHR [Electronic Health Record] system, gets used to their SDK and gets that up-and-running, hard to switch, hard to train, hard to train your patients, hard to get a whole another app downloaded. So, I think there are some switching costs.

And I also think there are some network effects here at play, where the more providers you have, the more service you can offer to customers, the more products you can offer and the more customers come to your platform. And that can go back-and-forth. Now, it's not the strongest network effect by any stretch, because again, they are competing against Teladoc, which does twice as many visits, but I do think they have a competitive advantage over potential upstarts, but make no mistake, they do not have this market to themselves.

Moser: Yeah. Well, and that's the nice part about it is, I mean, it is a massive market. And, you know, speaking to that, looking at some of these notes here in regard to the market size, the opportunities there for subscription revenue. Talk a little bit about that market opportunity and the potential you see for this business in the coming years.

Feroldi: Yeah, it's huge. It's huge and growing fast. I mean, they throw out some numbers that are in the billions of dollar range. And if you use just the U.S. and the number of lives that can be enrolled, there's also plenty of opportunities to expand these numbers over time due to more reimbursement reach, more access through government plans, such as Medicare and Medicaid. They also have clear plans to get into international markets the same way we've seen Teladoc do. The company has also said that we plan on making acquisitions to bolster-on new products. So, the company has a tremendous amount of room to grow, and I think the entire category will grow.

Moser: Yeah, I do agree with that. I think you're right there. Let's take a look at management and the culture of the company. Obviously, that's something we care about here at The Fool for a number of reasons. And while we don't look at co-founders owning the business as a reason to invest, it's certainly nice to see and it doesn't hurt the cause. We always love to see owners and founders with ownership stakes in the business there.

And while I'm sure many saw the Teladoc and Livongo merger, they think, wow! that's too big of a deal, they're skeptical, and there's a lot of challenges to overcome. One of the things that they noted, the two leadership teams together, was that the cultures meshed together very well; they were apparently very similar cultures. And I wonder, how does the culture strike you with Amwell? How does management strike you? Because they have a co-founder there with a pretty heavy ownership stake as well.

Feroldi: Yeah. So, this is a company that, again, was co-founded by two brothers, Ido Schoenberg and Roy Schoenberg, in 2006. Both of them, prior to founding this business together, were entrepreneurs and were executives at several companies in the healthcare space. So, these are two accomplished gentlemen. Ido is currently the Co-Founder, and Chairman, and Co-CEO; so, they are both splitting the CEO role. Roy is the Co-Founder, and President/CEO. So, they kind of control the Chairman, the President, and the CEO role together.

Of note to me is that each of them owns 25% of this business each. So, the two of them own collectively still 50% of this business. Given the size and the scale and the acquisitions that this company has gone through to get to where it is today, that's impressive, that's a lot of skin in the game.

Moser: Yeah, that really is. And you know what will end up happening from that is, the company will go public, that'll clearly play out on the float; the shares that are actually traded on the open market there. And over time that float can grow as lockups expire and shares are issued to do deals and whatnot. But it's always worth, I think, noting for investors, that when you have that type of heavy ownership from founders, that can play out on a lower float. A lower float can ultimately -- that affects liquidity, that can result in some "volatility," for lack of a better word. I mean, it's not necessarily a knock on the business whatsoever, but it's just a reminder for interested investors and potential shareholders that companies with low floats like that, you can see some pretty big moves just because the liquidity is not quite the same as some of these bigger companies that are out there. Again, that's not a knock on the business, not really anything other than just something to note. Perhaps it would fit as a risk.

And speaking of risks, let's talk about some of them, because we're making a leap of faith every time [laughs] we invest, Brian, and this time is no different. This is a leap of faith. But I don't know, from everything you're saying, this seems like it would be a pretty reasonable leap of faith, but what should investors be watching out for, what would hold you back from taking that leap?

Feroldi: Yeah, a couple of things I think were worth noting here. I mean, overall this is an interesting business. If you like Teladoc there are reasons to like Amwell as well; if for no other reason than I don't think it's a winner take all market, I think that there are room for multiple winners or especially two, kind of, industry giants. And the entire category is growing very rapidly. So, there's a lot to like here.

I also really like the fact that this company is still run by its co-founders who own such hard chunks, so that's definitely a big plus in Amwell's camp. However, few things I did note. Anthem is their largest customer and accounted for 22% of revenue through the first six months of the year. That's a lot of revenue concentration in one customer. On the flip side, it is worth noting that Anthem owns 3% of Amwell. So, they are a shareholder of Amwell, so that should give you [laughs] some confidence that that 22% of revenue is pretty secure. And their top 10 customers accounted for 44% of revenue. You do the rest of the math out there. So, that's nine other customers that account for 22% combined. So, customer concentration is more of a footnote here; I wouldn't freak out about it, it is something that I think is worth noting though.

The big thing to note here is, again, Amwell does not have this market to itself. There's Teladoc that they called as their competitor, No. 1 by far. There's also MDLive, there's also Doctor on Demand, there's lots of small companies that are trying to do exactly what they're doing. I think a big part of the strategy has to be, as we talked about previously, Jason, making acquisitions. And you really have to trust that the management team is going to not overpay and integrate those things well. That is a risk to keep in mind, because that is absolutely a part of the growth story here.

Moser: Yeah, I mean I think there's no question there. And frankly, I think that's probably OK. I think we've all been expecting consolidation in the space, and that's only natural. Again, with Amwell, its status in the market today, the fact that it's getting out there into the public markets now, that'll open up, I think, a lot of opportunities for it. And maybe the biggest risk in the near-term, and you've even noted this here, likely it's going to garner a high valuation given the enthusiasm for IPOs; we haven't seen very many compelling ones recently. And [laughs] you know, going back to Snowflake, I think we're going to see the same thing happen here with Snowflake. I would be surprised if we didn't see the same thing happen with Amwell.

And in the near-term, valuation is probably one of the greater risks. But healthcare is just a big market, it's a reliable market, just everybody needs it. So, you really do have to like those big picture opportunities. I guess the question for me is, interesting business, yes. Is this one you feel like compelled to go buy immediately, is this one you feel like you want to follow and keep on the radar? I mean, there's going to be some enthusiasm when it does hit the market. Where do you stand?

Feroldi: Yeah, this is going to be a radar stock for me. I mean, I am not a Teladoc Health shareholder personally. And a big reason why is, I just wasn't comfortable with the growth by acquisition strategy. Teladoc has clearly proven that they've done that well, but the Livongo transaction just takes things to [laughs] a whole new level in terms of size and scale. And I don't think it's a slam dunk that that transaction is going to pay off; we'll see.

With Amwell, I do like the management team, I do like the culture, I like the opportunity. I'm most concerned about the low gross margin. I mean, why is it so much lower than Teladoc? If they can show me that that was a one-time blip to, kind of, deal with COVID and they can get that number significantly higher in time, boy! Could that be exciting.

The stock-based compensation, I mean, that's something that I always look at, but here, it's extreme. I mean, there's [laughs] no doubt in my mind that this is going to wrap up post them coming public. So, that is something that I'm not comfortable with. So, between the growth by acquisition strategy, the fact that they're the No. 2 player and they have such high stock-based compensation, not to mention they're still nowhere close to flipping to profitability, this is going to be a radar stock for me that I'm going to follow with interest, but I'm not going to be buying it anytime soon. But I want to know what Jason Moser thinks of this, because he is Mr. Teladoc.

Moser: [laughs] Well, listen, I'm with you here. I feel like if this was five years ago, you know, it is definitely not garnering the same valuation when it goes public. And to me, it is more interesting just from that perspective, I mean, that's what captured my attention with Teladoc Health was, what the business does with experiences that I had in internet medicine, you know, from a time ago when we were living overseas. So, that's where the opportunity is, that's why I was excited about it. So, I'm with you.

I think there are enough reasons here that warrant keeping this close on the watchlist there, but there are also enough reasons -- when it comes to IPOs, I don't like jumping into them immediately, every time I do, I tend to look back and say, dang it! I wish I didn't. [laughs] And so, the lesson was learned. And probably five years now I'll break that rule again. I don't think I'm going to break it this time around, but I really do like the market opportunity, I like that inside ownership there. I mean, clearly these guys believe in this business and they've done a great job building something up.

I wonder on the gross margin side. I know that with Teladoc Health, they've witnessed some of that gross margin pressure as they build up more of the mental health offerings side of that business. And that's just by nature a lower margin offering. And so, as they've grown that mental health offering, that's impacted margins a little bit. I wonder if there's something in play with Amwell that's similar? But I reckon we'll find out.

Any ideas when this is going to go public?

Feroldi: I didn't see the date; I would imagine the next week or two, given how S-1s get filed. But, no, I didn't see the date on there. And I like to think that Amwell, Jason, once they come public, their long-term aspiration should be to make it into Jason Moser's Healthcare and Wealthcare basket.

Moser: [laughs] Well, you know, I've published a special report for the Next-Gen Supercycle service. The War on Cash part D., right? If I was going to build another War on Cash basket, I have three stocks that I thought would be worthy considerations, and if I was going to build another Healthcare basket, Healthcare part D., there's no question that Amwell would be on the shortlist for consideration. So, I'm excited to watch them go public, I'm excited to see how the business does

I was really excited to be able to do this show with you today and learn more about the company. Thanks so much for digging into the S-1 and giving all of our listeners such great information.

Feroldi: Anytime. Love talking about healthcare and tech at the same time, Jason.

Moser: Yes, Sir. And that's going to do it for us this week, folks. Remember you can always reach out to us on Twitter @MFIndustryFocus. You can drop us an email at IndustryFocus@Fool.com. Do you have any strong feelings on the Amwell IPO or any other IPOs coming up? Hey, drop us a line and let us know.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

Thanks, as always, to Tim Sparks for keeping us in the fairway here on the show. For Brian Feroldi, I'm Jason Moser, thanks for listening and we'll see you next week.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.