The world has clearly shifted to online aggregation platforms that simplify peoples' lives and make complicated choices more efficient. Whether it be used cars -- think Carvana (CVNA 5.85%) -- or digital auto insurance like Lemonade (LMND 8.23%), fashion disruptor StitchFix (SFIX 2.36%), or even doctor's appointments from Teladoc Health (TDOC 3.31%), companies with a first-mover advantage in creating tools for consumer choice are experiencing huge growth opportunities.
This opportunity is especially big for companies aiming to simplify confusing products in fragmented markets. Medicare health plans for senior citizens aged 65 and over are the poster children for these convoluted offerings. Besides the base Medicare package, there is the alphabet soup of Medicare Advantage add-on plans (Supplemental Plans A, B, C, D, etc.) that can make peoples' heads spin. Having the proper base plan and appropriate supplemental package is critically important to ensure adequate benefit coverage at an affordable price without onerous deductibles or out-of-pocket costs.
There is a clear market leader cutting through the muck, GoHealth (GOCO 4.11%), which IPO'd in July. Can the newly public company play the role of disruptor in the Medicare space? And should investors take notice?
Image source: Getty Images.
A major market opportunity
Very simply, GoHealth is a direct-to-consumer technology platform offering extensive expertise and customized plan options to Medicare Advantage enrollees, both online and via in-house agents. It accomplishes this by utilizing an extensive database with 20 years' worth of information, robust artificial intelligence tools, and a large network of plan providers linked to the platform.
GoHealth employs a multi-channel marketing strategy to drive leads both to its in-house team of experts, and to independent insurance agents who subscribe to its services. The business model is predicated on receiving commission revenue from its insurance carrier partners over the life of the coverage maintained by plan participants. GoHealth also receives ancillary revenue from those carriers for lead generation and marketing support services.
Medicare enrollment represents a massively expanding market opportunity. As the baby boomer population ages past 65, GoHealth's addressable audience is expected to grow from 60 million people to over 75 million people by 2028, per the company's projections. GoHealth is the leading player in this space. Its competitors are the smaller eHealth (EHTH) and SelectQuote (SLQT -0.60%), yet the company currently has only a 10% market share, per its IPO prospectus.
The growth potential for GoHealth is enormous. The company recognizes this and has been investing aggressively to build out its suite of services, concurrently adding a significant number of employed agents as well as additional insurance carriers to its platform.
After a tricky start, things are looking up
GoHealth has existed in private hands for 20 years, but went public last summer in an oversubscribed offering of 43.5 million shares priced at $21 per share (the original price guidance was $18 to $20 per share), raising $914 million in fresh capital. The stock opened for trading at $25, but has drifted lower in the ensuing months to its present level in the mid- to low teens. The stock price is $13.47 as of this writing.
Part of this can be explained by the potential overhang of shares from its original 70% majority owner, Centerbridge Partners, a private equity firm that may look to sell off more of its stake over time. Some of it is due to market concerns over potential "churn," which happens as people continuously switch plans on an annual basis, which lowers the lifetime commission revenue projections GoHealth expects to receive.
To be clear, none of these concerns have yet to manifest in any meaningful way. In fact, during its third-quarter conference call, GoHealth's management said its all-important Medicare annual enrollment period (October through early December) that drives the vast bulk of its revenue saw policy applications grow 83% year over year in October alone.
Management reiterated revenue guidance for fiscal year 2020 at $875 million at the midpoint and over $1 billion for FY21. At a $4.3 billion market cap, this is no tiny player. Once the marketplace grows comfortable with GoHealth's new virtual products such that its strong growth path is sustainable, the stock should begin to recover a significant amount of ground back toward its IPO pricing level or higher.
GoHealth is a rare bird among IPOs
In today's frothy IPO marketplace where companies seem to double in value overnight (for example, DoorDash), it is rare to find an IPO in the tech space that expects to achieve true earnings profitability in 2021, has expanding EBITDA margins, and is still trading below its initial offering price.
GoHealth is a fast-growing company with a large untapped target market and is already the leader in its space. Yet it is priced at an almost 50% discount to where institutional investors bought it just a few months ago. GoHealth is a rare find, and offers a compelling long-term investment value for healthcare investors looking to add stocks to their portfolios for 2021.
