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Why GoodRx Holdings Stock Suddenly Jumped This Afternoon

By Jon Quast – Dec 11, 2020 at 4:21PM

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One analyst believes the stock can return to previous highs.

What happened

The morning started quietly for GoodRx Holdings (GDRX -4.07%), with shares fluctuating from slightly down to modestly up. Then an analyst with Hedgeye said it had 50% upside, causing the stock to suddenly jump. While it's still down about 25% from highs reached in October, it gained back ground today. As of 3:20 p.m. EST, GoodRx stock was up 10%.

So what

Hedgeye analyst Tom Tobin thinks GoodRx stock has 50% upside, according to Bloomberg. Tobin noted how the company beat expectations when it reported earnings for the third quarter of 2020. He also believes that investors will rekindle their excitement for the company's long-term prospects, helping the stock regain previous highs.

A red rocket prepares to fly over a rising bar chart.

Image source: Getty Images.

It's important to understand why GoodRx stock is down in the first place. Amazon launched a pharmacy business, sending GoodRx stock down 22% in November. Some see this as bad news for GoodRx, because of how many Amazon Prime members there are. And to be sure, the news scared off some investors. But GoodRx's CEO in a CNBC interview said, "I don't think it's material to us at all."

Now what

What concerns me about Tobin's commentary on GoodRx stock is why he believes it will go up 50%. It's partly because the business is doing well. That's good. But half of his thesis seems to be predicated on investors getting over fears related to Amazon's pharmacy business. In other words, investors will buy back in, sending the stock to a higher valuation. This is called "multiple expansion."

When it comes to investing in stocks, I personally never count on multiple expansion. Stock research is founded on a vision of how a business will be performing several years in the future, and asking whether it presents a good value from today's price. Ultimately, we don't know when or if GoodRx bears will change their minds and bump the valuation higher. But we can do other things, like hold GoodRx's CEO to his assessment of the Amazon pharmacy risk.

If Amazon's pharmacy launch is truly immaterial to GoodRx's business, then there shouldn't be any material change in coming quarters. Investors can monitor any updates Amazon gives and compare it to GoodRx's results to see if management accurately assessed the risk. If it did, then that would be a great signal for the long-term viability of this growth company.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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