Even the best businesses have weak quarters. But with GoodRx (GDRX 1.55%) shares down more than 64% in the past year, the company's shareholders are likely to be somewhere between displeased and apoplectic after it announced mediocre fourth-quarter earnings on Feb. 28.
Still, appreciating the investment merit of a high-growth stock like GoodRx isn't something that can be done on the basis of short-term results alone. And seeing the nuances that other investors don't is certainly useful when it comes to getting a good return for your dollar. So let's take a look at three things that smart investors know about GoodRx -- that most people may not -- so that you'll be in a better position to judge whether it might make for a good addition to your portfolio, recent performance aside.
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1. Its base of loyal customers will continue to grow
The key to GoodRx becoming a successful company is making sure its stakeholders have an incentive to keep coming back to use its services.
For many people, the gateway to becoming a customer is through the prescription drug coupon program, which enables consumers to get the lowest possible prices on their medicines. To accomplish this, GoodRx negotiates with pharmacies, drug manufacturers, pharmacy benefit providers, and patient assistance programs, taking a small cut of the difference in cost, which it then passes on to consumers. That service is free.
As of Q4, 6.4 million people were monthly active consumers with the prescription cost-cutting service, an increase of 14% year over year. Plus, 1.2 million of those people were willing to pay for a subscription to get expanded discounts and other features, which is 51% more than there were in the same quarter of 2020.
Therefore, it's no surprise that GoodRx is seeing significant growth in its base of recurring revenue, too. In 2021, it brought in $745.4 million, 35% more than the $550 million from 2020. And management has stated that its No. 1 priority for 2022 is to increase its brand awareness and reach even further.
In sum, smart investors expect this company to keep growing its income rapidly, but that isn't the only consideration when it comes to buying the stock.
2. The threat of scope creep is starting to rear its head
Smart investors are likely to be growing leery of GoodRx's ever-increasing set of products and services.
Far from being a consumer cost-cutting business alone, it also aims to expand into telehealth, mail prescription delivery, knowledge bases for healthcare providers, and solutions for pharmaceutical manufacturers. Some level of diversification is good, and the movement into telehealth could even be viewed as logical, given the company's knowledge of people's prescriptions.
But, especially for a growth-stage business like GoodRx, the threat of over-diversification is real. By spreading its resources thinly across so many different activities, its ability to successfully compete in any individual segment is lowered. When facing empowered competitors like Teladoc Health, it's hard to see how GoodRx could rate without a full-force effort.
Thankfully for shareholders, there's no guarantee that advancing with so many different initiatives will end poorly. If things go well, it'll mean raking in cash from a bunch of different places, thereby making it harder for any single competitor to devastate its top line.
On the other hand, costs from new programs are likely to add up quite quickly, though it's important to recognize that over the last year, expenses have actually slightly fallen as a percentage of quarterly revenue.
3. Its share repurchase program might be a trap
Wise investors know that sometimes returning money to investors too early can sabotage a business's growth prospects. Growth-stage businesses tend to keep expanding as long as they can do so at a rapid pace, at which point they mature and then start to prioritize things like cash flow and shareholder rewards.
On that note, perhaps to mitigate the impact of its Q4 earnings, on Feb. 28 management announced it had authorized a share repurchasing program of up to $250 million. There are a couple of issues with that, starting with the fact that the company is strongly unprofitable, so it'll struggle to replace the money it's handing off to shareholders.
And it isn't exactly flush with cash, either. Its liquid assets of $912 million are enough to cover 2021's total expenses of $732 million, but not when taken in addition to the money set aside for share repurchases. That's a problem, considering research and development expenditures are all but fated to continue rising in light of GoodRx's multi-service ambitions.
Now, there's a solid chance that it'll be able to do the repurchase without causing problems elsewhere. Nonetheless, smart investors will take note and hit the bricks if it looks like the enterprise's growth is going to be threatened by overly generous shareholder compensation.
