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Why This Ultra-High-Growth Healthcare Stock Is a Buy

By Jon Quast and Brian Feroldi – Sep 4, 2021 at 6:43AM

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When a founder-led company is profitably chasing a huge market and having early success, the stock is worth a closer look.

Investors love the explosive growth that many healthcare stocks can provide. But it's hard to find many that offer growth and profits like Progyny (PGNY 0.17%) does. In this video from Motley Fool Live, recorded on Aug. 26, Fool contributor Brian Feroldi explains not only this but many other reasons that investors need to give this healthcare stock a look for their portfolios. 

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Brian Feroldi: I got one more stock to talk to you guys about and that is Progyny, PGNY -- another company that flies under a lot of people's radar. Progyny, for those that don't know, is a mission-driven company. Mission: To make any member's dream of parenthood come true. They are focused on the fertility market.

What does this company do? It is a benefits manager in the United States that specializes in fertility. They do one-on-one consultations and hand-holding with anybody that has infertility problems. They have a network that they can plug them into of fertility specialists around the country. They use their data, size, and scale to maximize the chance of a healthy pregnancy.

For those that don't know, the infertility market is really massive and really big in terms of costs. If you have a pre-term birth, if you have a miscarriage, if you have multiple live births, the costs to these both direct and indirect to employers annually is about $40 billion. Huge, market. Anecdotally, my dad is a CFO at a company and he has been talking about healthcare costs forever. He says, "You know what the most expensive thing that we have to pay for is? That is pre-term birth." If somebody has to go into the NICU or if it is a troubled pregnancy, it is unbelievably expensive. The amount of dollars that go into this industry are just massive.

Progyny sets itself apart from others by again going on one-to-one care and they provide a highly personalized advice and medicine to help maximize the chance of clinical success.

The other thing they do is they have a differentiated payment model, often times the employees don't know what benefits they have access to. It's basically all on the employee to figure the stuff out on their own. Progyny sets up payments in a different way so that they have these things called smart cycles. Each of those smart cycles is basically one try at a pregnancy. The patient knows all their costs and benefits and everything upfront.

As a result of that, people that have used this service really love it. The Net Promoter Score here is 72. For those that don't know the Net Promoter Score, anything over, I think, it's 40 is really good. Net Promoter Score of 72 is just excellent.

Importantly, at this stage, they have a few competitive advantages going for them. First up, they have the largest network that is spread throughout the United States and they have the data to show that when you use Progyny, while they're using, in many cases, the same providers, the same medicine, and the same technique, because of their one-on-one individualized service, they have higher life birth rates, lower rates of twins (which is something very common when you have in vitro fertilization), and lower rates of miscarriage. It's really a win. Basically, it has been all around. That's how they separate them.

What's really interesting to me about this company is that there's already signs of optionality -- not only optionality, but successfully optionality. A few years ago, they just did the benefits management part where they offered this service. However, a few years ago, they started offering a pharmaceutical service where they added in a new service where they would manage the patient's pharmaceuticals. Already, 70% of their clients adopted this service and this has become a major revenue source for the company. I really like seeing that early on in the game that they've already developed the second line of business and it's having success.

In terms of clientele, the company really started out by going after some of the big tech companies that are out there, Microsoft, PayPal, Google [owned by Alphabet], Dropbox, etc. You can see some of their A-List clients that are on there. They really started by focusing on tech companies that could really afford this service. They've successfully added dozens of other companies in different categories. They're doing a good job of expanding beyond their start in the core tech market and they've signed up some big companies as clients.

Financially, the company has several benefits going for it. First off, all their revenue is recurring in nature and it is highly visible. Second, it has grown extremely quickly. If you were to ask me "what's going to happen to this company in 2020," I would have said, well, this is a nice-to-have benefits. Revenue is going to stall or fall to the floor. Revenue growth accelerated in 2020, and it's going to 51% compound annual growth rate over the last six years.

More importantly, this is a profitable business. It's profitable. It is not only growing in a hypergrowth mode, it is doing so while producing free cash flow and profits.

Moving forward, the company has, I think, a realistic growth plan. They're going after self-insured clients, which opens up 8,000 new target companies for them, they're going to launch new products, they're going to launch new services, and they're going to expand into adjacent market opportunities.

If you look quickly at the management team, it is a founder-led management team, the CEO owns 5%. The Glassdoor ratings are pretty good.

If you look quickly at their financial results, I only have one minute left, but they were spectacular, revenue grew 99%, margins expanded by 450 basis points, and the company reported a net income of $19 million in the most recent quarter. Again, the fertility benefit was up 99%, the pharmacy benefit was up 99%.

If you are looking for a high-growth, differentiated, founder-led business that is profitable, check out Progyny, ticker symbol, PGNY.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Jon Quast owns shares of PayPal Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, PayPal Holdings, and Progyny, Inc. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Progyny, Inc. Stock Quote
Progyny, Inc.
$34.38 (0.17%) $0.06
Microsoft Stock Quote
$247.49 (-0.04%) $0.09
Alphabet (A shares) Stock Quote
Alphabet (A shares)
$97.46 (-1.02%) $-1.00
Alphabet (C shares) Stock Quote
Alphabet (C shares)
$97.60 (-1.24%) $-1.22
PayPal Holdings Stock Quote
PayPal Holdings
$80.08 (-0.83%) $0.67
Dropbox, Inc. Stock Quote
Dropbox, Inc.
$22.28 (-0.71%) $0.16

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