The year 2020 has been a big one for telemedicine. The ability to visit with a healthcare provider via the phone or online video conferencing has been around for awhile, but usage of such services had been modest. COVID-19 changed all of that. Amidst the crisis, Google-backed telemedicine upstart American Well (NYSE:AMWL) has been making hay.
Moving upmarket in healthcare
Amwell differs from telemedicine's early leader, Teladoc Health (NYSE:TDOC), which is merging with Livongo Health (NASDAQ:LVGO) in a blockbuster deal to widen its lead in providing patients remote visits with a healthcare professional. Amwell, meanwhile, has moved upmarket and built a platform that healthcare providers can make use of, rather than employing those specialists directly.
The company's platform consists of hardware in the form of video-conference and phone-call workstations, software, and apps, all of which are designed to integrate with an existing healthcare operation and expand telemedicine capabilities. Amwell offers two basic functions: "home line" (for provider-to-patient interactions) and "hospital line" (primarily for provider-to-provider collaboration). Additionally, Amwell also offers a value-added service called AMG that employs primary care physicians and other specialists, supplementing Amwell clients' staffing needs (for example, during nights and weekends when a traditional provider may not normally be open for its patients).
Amwell already powers digital medical care for over 2,000 hospitals, 55 health plans, and various other health tech innovators. It nevertheless has ample room to keep expanding -- for example, by becoming a Medicare and Medicaid program provider. It also has the potential to partner with health plans within the various branches of the U.S. government, and growth outside of the U.S. has barely been tapped at this point. As a result, much of Amwell's expense growth (and a big reason for the losses it generates -- more on that in a second) is the hiring of new members of its direct sales force.
The 2020 telemedicine boom
Amwell was growing fast even before the novel coronavirus pandemic. Revenue increased 31% to $149 million in 2019, generating a net loss of $87.2 million (or a $72.7 million loss using adjusted EBITDA, or earnings before interest, tax, depreciation, and amortization). The company has hauled in nearly that much during the first half of 2020 alone. Revenue was up 77% to $122 million in that time, with a net loss of $111 million (or adjusted EBITDA loss of $31.1 million).
About all that red ink: Growth is the name of the game here, and the bottom line will come later. Amwell expects to use proceeds from the IPO to support its expansion efforts. Priced at $18 a share (and rising nearly 30% on day one of public trading), Amwell netted $922 million in cash. Added to what it had as of the end of June 2020, Amwell's war chest totals $1.18 billion in cash, equivalents, and short-term investments, and zero debt.
Though many investors may be uncomfortable owning a company that generates so much red ink, the good news is that Amwell is quickly homing in on breakeven (at least on an adjusted basis, which backs out non-cash expenses like stock-based compensation to its salespeople and management team).
Where does Google fit in?
In August, Alphabet's (NASDAQ:GOOGL)(NASDAQ:GOOG) Google made a $100 million investment in exchange for Amwell stock. It gives the internet search giant a roughly 3% ownership stake in the telehealth upstart after the IPO. More important than an equity holding in Amwell, Google Cloud will handle the company's telehealth video traffic and other cloud operations. A partnership to further develop other healthcare technologies will also accompany the cloud agreement.
Is it a buy?
As of this writing, Amwell has a market cap of $5.3 billion, valuing the shares at over 26 times trailing-12-month revenue. It's a hefty price tag, one that looks even more expensive given that gross profit margin (revenue minus cost of services as a percentage of total revenue) was only 37% through the first six months of 2020.
Other tech platforms carry much higher margins. Teladoc, for example, operated on gross margins of 61% so far this year. However, Teladoc also had revenue of $422 million to Amwell's $122 million. As the smaller outfit grows and its platform scales, gross margin should improve.
Plus, there's the huge net cash stockpile that makes up 20% of the current market cap, giving Amwell plenty of room to maximize growth as it chases down telemedicine market share. If it can maintain its fast pace of sales growth, the steep price tag doesn't look so unreasonable for investors seeking to hold for at least a few years.
Personally, I usually wait at least a few weeks before making a purchase after a recent IPO, but this promising player in the healthcare industry is near the top of my watchlist.