Telemedicine is rising in popularity during the coronavirus pandemic, and it's been a hot place to invest in this year. Look no further than Teladoc, which has soared 169% so far in 2020. As patients and doctors adapt to a new normal and less face-to-face interaction, there's a growing need for more technology in the healthcare industry. That makes new issues in this part of the segment particularly attractive buys.
GoodRx (GDRX -0.14%) went public in September, and its shares soared 53% on their first day of trading. However, now that the dust has settled and the hype's died down, let's take a closer look at the stock and assess whether it's a good long-term investment worth adding to your portfolio today.
Does the business have a sustainable competitive advantage?
This is a question investors should always ask when evaluating a business for the first time. It's what billionaire investor Warren Buffett refers to as a "moat" -- a key benchmark he considers when deciding whether to invest in a business or not. The wider a company's moat, the safer it is from competition. The bulk of GoodRx's business centers around prescriptions. When someone uses a GoodRx code to fill a prescription, the company is entitled to earn a fee from the pharmacy benefits managers (PBM) that it has contracts with. In 2019, 94% of the company's sales were due to these prescription transactions.
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The key advantage that GoodRx has right now is the agreements it has with PBMs. Plus, its easy-to-use app is very popular with customers. The number of active users is a key metric for GoodRx as it is for many tech companies that rely on apps. GoodRx's monthly active users reached 4.4 million for the period ending June 30 -- 25.7% higher than the 3.5 million users it recorded at the same time last year. Users love the app since it helps them find good deals on prescription drugs and thus save money.
However, that doesn't translate into a wide moat. Tech companies with greater resources could potentially offer more competition for GoodRx in the future. One example is Amazon, which acquired the online pharmacy PillPack in 2018. The Amazon Pharmacy fills prescriptions and delivers them directly to patients.
In September, Walmart announced it would be expanding its health-service offerings to additional locations across the country. The big-box retailer currently offers low-cost healthcare options, including primary care, optometry, and dentistry, in five of its stores in Georgia and one in Arkansas. Walmart said last month it will now be launching the services in Chicago and Jacksonville in addition to more locations in Georgia by the end of next year. It's also eyeing Orlando and Tampa as potential markets.
Both Walmart and Amazon are serious threats that could potentially undercut GoodRx by offering better discounts. The danger to GoodRx is that they could chip away at the company's active user base and steal some market share. If there's one company a business doesn't want to be competing against on price, it's Walmart.
GoodRx acquired telemedicine company HeyDoctor in 2019, but that isn't going to be easy to grow. Teladoc's merger with Livongo Health creates a giant in the industry that will also pose significant competition. GoodRx launched its telehealth marketplace in March. Since then, it's attracted one million visits from customers, resulting in over 200,000 medical visits and tests. By comparison, Teladoc reported 2.8 million virtual visits on its telehealth platform in its most recent quarterly results, for the period ending June 30.
How strong are GoodRx's financials?
Growing competition doesn't necessarily mean GoodRx is in trouble, especially if its business is strong. In 2019, the California-based business recorded a profit of $66 million -- up 50.8% from the previous year. Through the first six months of 2020, GoodRX's bottom line is already at $54.7 million with a profit margin of 21.3%.
It's one thing for a company's sales to be growing, but many new IPOs aren't yet profitable, which isn't the case for GoodRx. With a strong profit margin, the company's in good shape even if a rise in competition leads to tighter margins and a slimmer bottom line.
A look at the valuation
As good as the business may be, it's important to consider its current valuation. Today, GoodRx is at a $20.2 billion valuation. That's a hefty price for a company that's generated profits of just $89.5 million over the past four quarters.
The company's stock has a hefty price-to-earnings (P/E) ratio of around 225. That's more than 10 times the 22.9 P/E that the average stock in the Health Care Select Sector SPDR Fund trades at. And if you look at the company's price-to-sales ratio, GoodRx's valuation still looks extreme, trading at more than 40 times revenue. The average healthcare stock trades at just 1.7 times its sales.
GoodRx isn't a buy right now
There's a lot to like about GoodRx, but unfortunately, its high valuation makes the stock too expensive to own today. The markets as a whole are overpriced, and GoodRx isn't an exception. And with a potential market crash just around the corner, it may not be long before GoodRx and other stocks become a lot cheaper. If you're eager to invest in this stock, you may be better off waiting for now.
Over the long term, GoodRx possesses lots of potential. But with some big companies like Amazon and Walmart taking more of an interest in healthcare, this is not a stock you can just buy and forget about.
