Most investors would say that a stock is pretty hot if it went up more than 50% in a year, but what about one that soars even higher in less than one month? Such a stock would be considered sizzling hot.
American Well (NYSE:AMWL) definitely fits that definition. Its shares are up nearly 60% since the telehealth company's initial public offering (IPO) on Sept. 17. Could AmWell go even higher, or is the stock now too hot to handle?
A nosebleed valuation and a potential problem
AmWell looks expensive. The company's market cap tops $8 billion with no profits yet. As a result, you can throw earnings-based valuation metrics out the window.
The healthcare stock currently trades at 19 times trailing-12-month sales. Many investors would consider that nosebleed valuation territory.
Yes, AmWell's sales are growing rapidly. However, much of the company's recent growth has been fueled by the COVID-19 pandemic. AmWell reported that its average monthly visit volumes quadrupled in the three months ending June 30, 2020, compared to the first quarter of this year. Its average monthly active providers skyrocketed 400% quarter over quarter.
But can that growth trajectory continue? Sooner or later, the COVID-19 pandemic will be over. Safe and effective vaccines could be widely available in the U.S. next year. The pandemic has also led to the relaxation of some regulatory and reimbursement barriers for telehealth. It's possible that when the healthcare crisis is over, those barriers will be put back into place.
AmWell's shares are priced for perfection. If its growth rate slows significantly as coronavirus concerns fade, restrictive regulations return, and reimbursement hurdles reemerge, the stock will almost certainly plunge.
Mountains or molehills?
Even AmWell bulls would likely agree that the stock isn't cheap. They might not even dispute that the end of the pandemic could present some challenges for the company. However, proponents of the telehealth stock would also almost certainly argue that these issues are molehills and not mountains.
For one thing, AmWell's revenue increased more than 30% year over year in 2019, before the COVID-19 outbreaks began. That's in line with the revenue growth generated by top telehealth stock Teladoc Health (NYSE:TDOC), and AmWell's shares trade at a lower price-to-sales ratio than Teladoc's shares.
The COVID-19 pandemic has certainly poured fuel on the fire with the adoption of telehealth. That fire isn't likely to die down once the pandemic ends. On the contrary, AmWell's recent annual physician and consumer survey indicates that telehealth use will accelerate when the COVID-19 crisis is over.
What about potential reinstatement of regulatory and reimbursement challenges? That could hurt AmWell in some ways. However, the overall impact could be positive for the company. In particular, the renewed focus on enforcement of privacy laws could push some smaller telehealth players out of the market, paving the way for big players like AmWell and Teladoc to consolidate their market share.
The heat is on
Investors should focus more on the future than the present or the past. My view is that AmWell's future appears to be very bright.
The company estimates that the total addressable market for its telehealth subscription services for health plans and health systems is around $12.4 billion per year. Add to that total another $22.1 billion addressable market for AmWell's AMG staffing network. Currently, AmWell's share of these markets stands well below 1%.
Keep in mind that these markets are growing and will almost certainly continue to do so for years to come. I think that AmWell is well-positioned to be a big telehealth winner over the long run. This sizzling IPO stock isn't too hot to handle. Instead, its opportunities are arguably too hot to ignore.