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Is Oscar Heath's IPO Flop a Buying Opportunity?

By Brian Orelli, PhD and Keith Speights - Mar 25, 2021 at 7:57AM

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The valuation metric assigned to the company will determine whether the health insurer is really on sale.

Health insurer Oscar Health (OSCR -0.52%) has had a horrible debut on the public market, with shares trading substantially below the IPO price. Unfortunately, Oscar seems caught between a valuation based on its technology prospects and its core business as a health insurer, where the economics aren't nearly as prosperous.

In this video from Motley Fool Live, recorded on March 8, contributors Brian Orelli and Keith Speights discuss Oscar's potential and the considerations investors should take into account when valuing Oscar Health.

Brian Orelli: Moving onto our last story is health insurer Oscar Health -- IPO'd last week. This was a sort of normal, regular, everyday IPO -- those cool things that people used to do before SPACs got involved. The company raised $1.4 billion. They sold shares at $39, which is above the target range of $36-$38, but then it closed at $34.80 on its first day of trading and then went down to $32.07 on Thursday and closed at $31 on Friday. It's not exactly the best way to start off as a public debut, but we're long-term investors here. Any thoughts on pricing and, more importantly, the long-term prospects?

Keith Speights: Yeah. I think Oscar Health was, more than anything, a victim of bad timing with its IPO. The IPO happened to occur during a pretty miserable week for growth stocks. I think that was just unfortunate for them, and you can never tell. Sometimes, companies will IPO, and it's a great week and the stock flies, and sometimes, it doesn't happen. And that's what we saw with Oscar.

Overall, though, I think the company has a huge opportunity. There's obviously a major need for disruption in health insurance and really in healthcare overall, and Oscar Health is bringing some of that disruption to the industry. I think that's great. I think they do have tremendous prospects.

I think the challenge for Oscar, at least for investors, is should it be valued like  a tech stock or like a health insurance stock? And it's really kind of both because technology is so core to what they're doing. Right now, even with the disappointing IPO, the stock is definitely priced more like a tech stock, but I think we'll have to see whether or not that's really warranted.

One problem for Oscar, again, while I do like its opportunities, but one problem I see is that if the company becomes successful enough, if it grows large enough, that will validate that its model really works. I just wonder if some of the bigger health insurers could try to copycat what Oscar Health has done. If they see the success, they say, "Okay, we're going to do something similar," and maybe over the long run, Oscar disrupts the health insurance industry by causing the bigger players to follow its lead. It remains to be seen. It's definitely something I would like to watch over the next couple of years.

Orelli: Yeah. I think the financials are still a lot closer to health insurance than tech services, software-as-a-service type thing. Although maybe they deserve a premium over the general health insurance stocks because, hopefully, their tech will allow them to grow faster than other health insurance stocks. I think that investors probably should be really focused on valuing them closer to insurance stocks compared to general tech.

Speights: I would agree.

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