Oscar Health (OSCR -2.67%) has fallen over 70% since it went public this March. But the stock is deeply misunderstood. Oscar may now be one of the best long-term U.S. technology investments available -- with more than 10,000% upside over the next decade.
Am I crazy? What is Mr. Market getting so wrong? Fundamentally, investors view Oscar as another health insurer. But they should be thinking about it more like a technology business. Here's why.
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If you're investing in Oscar Health, you need to know about +Oscar
Oscar is the most exciting new company to enter health insurance in decades. Through its revolutionary focus on technology, it's poised to actually deliver on things the healthcare industry has been promising for over 50 years. Its current member count is only 594,000, less than 0.2% of its potential market. But it's earned $1.3 billion in revenue during the first nine months of 2021, more than four times what it grossed over the same period last year.
One could easily see Oscar's current membership numbers growing explosively. But I believe it almost doesn't matter if they do. This is because of an exciting, under-followed division of the company called +Oscar.
Launched this April , +Oscar is more akin to a business-to-business software-as-a-service (SaaS) product than a traditional health plan. And it could allow Oscar to dominate U.S. health insurance without ever selling another policy.
+Oscar allows other insurers and risk-bearing providers, especially smaller and regional player, to rent Oscar's full-stack technology platform. This gives them ready access to high-quality cloud-based technologies to lower costs, drive efficiency, and improve member experiences and outcomes in ways they cannot themselves.
Today, +Oscar is a minuscule division of a comparatively small firm. +Oscar forecasts it will gross only $50 million of fee-based revenue in 2022. It is not yet even reported as a separate segment.
But +Oscar is already making impressive inroads. It has now closed deals with some of the biggest names in American healthcare, including the Cleveland Clinic and Cigna. As parent Oscar continues to sign on famous providers like HCA Healthcare, Colorado Health Systems, and Memorial Hermann in Houston, additional +Oscar deals with these groups or their partners may follow.
There is reason for caution. In its earliest start-up days, Oscar did not have the resources to even deploy its own technologies. Even now, the company admits it has a long way to go to build the end-to-end, FAANG-quality systems it envisions.
But Oscar's technology is already superior to much of the industry's. Its founding team and earliest technical hires have technical backgrounds unparalleled in the industry's history. Before even graduating college, CEO Mario Schlosser was a Visiting Scholar in Stanford's computer science department, where he co-authored 10 leading publications, including one of the most cited computer science papers of the decade.
It's all about the data
As with many other industries, the name of the new healthcare game is data. Facebook, Google, and Amazon do not have moats simply because of the number of people who use them. Rather, with every new click or input we give them, we make their algorithms smarter, more useful, and harder for new entrants to match. Similarly, Oscar's ability to better engage users and collect more data than competitors will ultimately become its economic moat.
Data will allow Oscar to do things like recommend the best value-for-money doctors in your zip code -- or nudge you to early interventions that might save you money or extend your life down the line.
Currently, +Oscar clients can choose to either pay licensing fees or risk-share directly with the company. By sharing risk with smaller carriers now, Oscar can keep acquiring data while largely bypassing the traditional regulatory and marketing expenses associated with launching new health plans in each state.
To be sure, old-line competitors like UnitedHealth Group have deca-billion-dollar bottom lines. They can invest in new technology like this also, and, in some ways, finally are. Former top executives from these carriers have also recently launched start-up health insurers of their own, such as Bright Health Group, co-founded by UnitedHealth's former CEO and CFO.
But Oscar has zero legacy infrastructure to worry about. It has a codebase that is updated more than 50 times each day. It's far better positioned to keep improving its technology, products, and services than most rivals, a huge advantage as the healthcare industry continues to evolve.
The 10,000% opportunity
Investors should not just be focused on Oscar's premiums or underwriting results, as they might with a traditional health insurer. Instead, they should be thinking hard about engagement -- and data. That Oscar has previously shown profitable unit economics in traditional health insurance is great, especially given its small size. But the company's true promise lies in its technology. This includes in harder-to-understand areas like population health.
UnitedHealth currently earns 175 times Oscar's revenue. But, as a software player, Oscar would need to increase sales less than 20 times in coming years to match those of Salesforce.com. If it did, SaaS's superior unit economics mean improved margins and multiples might not be far behind.
SaaS-style margin expansion could coincide with continued growth at or above current levels for a few years. If this happened, Oscar could easily earn a price-to-sales multiple comparable to Salesforce's current 10.5. And, over the next decade, that could easily lead to a 10,000% return from current price levels.
Even if this SaaS story does not play out, it's likely that Oscar will become remarkably profitable, purely as health insurer, once it achieves scale. Scale is necessary because of the Affordable Care Act.
Unlike either Salesforce or UnitedHealth, Oscar has announced it won't be profitable until 2023. But, if you can bear the short-term pain, invest at current prices. You'll be supporting a better future for American healthcare -- and your portfolio.
