Every American knows a little about the money wasted within the healthcare industry, with the average cost spent per citizen each year rising to around $5,000. A large chunk of this waste comes from the pharmaceutical industry, where many consumers are unaware that they are paying much more than they could when filling their prescriptions. Recent IPO GoodRx (GDRX -3.08%) is working to fix this issue. The digital health platform and mobile application aggregates prescription drug prices across the country, making it simple and easy for people to find the cheapest option for their prescriptions. But does the stock belong in your portfolio?

A woman and child picking up drugs at the pharmacy

Image source: Getty Images.

The business model

GoodRx is a consumer platform built to help people find the best prices on drugs. The company accumulates many data points on drug prices across the U.S., helping users save money when filling prescriptions. So far, according to its website, GoodRx has helped its users save over $30 billion on pharmaceuticals.

GoodRx makes money when someone uses a GoodRx code at a pharmacy. Essentially, it is an aggregator of drug prices, getting a cut of the sale when it sends a consumer to a specific pharmacy. It also makes money when customers refill their prescriptions at the same pharmacy and has a monthly subscription service called GoodRx Gold that gives subscribers even more discounts on drug prices.

At the end of the first quarter, GoodRx had 5.7 million monthly active customers (MACs) and 931,000 subscribers to its GoodRx Gold and Kroger Savings Club memberships. MACs grew 17% in the first quarter, which is solid, but subscribers are growing like a weed, up 96% year over year.

GoodRx is highly profitable

Last quarter, GoodRx had $160 million in sales, up 20% from the prior year. Profits looked scarce in the quarter, with only $1.7 million in net income. However, this was due to one-time non-cash expenses associated with its IPO last fall, masking the phenomenal unit economics of the GoodRx model. The company has generated an annual profit every year from 2016 to 2019, growing operating income from $18.8 million to $139.7 million during that time span.

Two things make GoodRx's financials so impressive. For one, its shown that it can bring its operating margins to great heights, reaching 36% in 2019. And two, it has grown sales at the same time, from just under $100 million in 2016 to $388 million in 2019. 

One thing to watch out for is the large amounts of stock-based compensation given to the founders and co-CEOs of GoodRx, Trevor Bezdeck and Doug Hirsch. Before the company went public, the board of directors offered them in total over $500 million in stock options. This isn't necessarily a bad thing, but has the potential to dilute other shareholders if and when the options get exercised over the next few years, creating a headwind for earnings-per-share growth. 

But does it belong in your portfolio?

As of this writing, GoodRx has a market cap of $11.9 billion. Based on the low end of its full-year revenue guidance of $740 million, the stock trades at a forward price-to-sales ratio (P/S) of 16. This is quite high compared to the market average of three. However, investors should remember that GoodRx has phenomenal gross and operating margins, making this nosebleed valuation look a lot more reasonable. Although not an apples-to-apples comparison, software stocks like Adobe (NASDAQ: ADBE) and Autodesk (NASDAQ: ADSK) have similar profit margins to GoodRx and also trade at P/S ratios in the teens.

After reading about GoodRx, I think it is pretty clear that the company is disrupting the legacy systems of the pharmaceutical industry, giving consumers access to cheaper drug prices they never knew existed. This a win for the consumer and GoodRx, and will keep customers coming back to the platform. The stock does trade at a steep valuation, which might keep it out of some investor portfolios. However, if the company continues growing MACs and subscribers over the next few years while also sustaining its historical profit margins, that high valuation will come down rather quickly.

If you like to own high-growth stocks trying to disrupt massive industries, GoodRx could be a perfect fit for your portfolio.