May wasn't a terribly great month for the S&P 500. The index was volatile and finished about where it started. Many top growth stocks struggled with shares like Shopify and Tesla falling sharply during the month. But there were some solid-performing stocks during May that outperformed the markets by a wide margin.
Among the hottest stocks last month was Amwell (AMWL -2.13%). The telehealth stock was up nearly 21% in May, and it has been building on those gains in recent days. What's behind the stock's rally, and is now a time to buy it before it potentially takes off even higher?
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Amwell posted strong Q1 results
It was shortly after the company reported earnings last month that Amwell's stock started to gain momentum. For the first three months of 2022, Amwell posted sales of $64.2 million which rose 12% year over year. Its gross margin of 43% was up from 38% previously. Plus, there were 1.8 million telehealth visits during the period, up from 1.5 million in the previous quarter. Those are all excellent signs the business is moving in the right direction.
That's particularly important as the company is in the midst of a transition to its new Converge platform, which will act as a hub to host other telehealth apps. This will potentially make the business less reliant on telehealth visits of its own and will allow it to benefit from innovators paying subscriptions to access its platform. Amwell has been migrating customers to the new platform and said it "drove a record number of active providers on the platform and visits on Converge also grew."
Amwell doesn't break out new vs. old platform revenue, so it can be difficult right now to determine just how well things are going. However, total platform subscriptions generated $28.7 million in revenue last quarter and were up 17% year over year. Visit revenue totaled $30.7 million and rose by a more modest rate of 10%.
The business still has many risks
Although Amwell reported some encouraging numbers, its operations remain unprofitable. And there is no shortage of challenges still there for it to tackle. Its $70 million loss during the quarter was 79% higher than the $39.2 million loss it incurred in the same period last year. A key reason for that: Its costs and operating expenses jumped by 40% to $134.7 million. Over the trailing 12 months, Amwell's net loss now sits at $207 million on revenue of $259 million. Although the company is showing signs of growth, it is also spending more money to chase those sales.
Another issue is that Amwell is burning through cash. At $62 million, it used up 51% more money in Q1 to fund its day-to-day operations than it did a year ago. The company has been putting money into investments, and as of the end of Q1, its cash and cash equivalents balance stood at just $177 million. The risk for investors here is that if the company's turnaround doesn't happen fast enough and Amwell isn't able to produce stronger numbers, dilution may be inevitable, which could have a terrible impact on a stock that has already tumbled 67% in the past 12 months.
Is Amwell a buy?
Amwell trades at a price-to-sales multiple of just over four. That's about the lowest it has been since the company went public in 2020. However, that still doesn't make it a safe enough buy for anyone but a contrarian investor with a high risk tolerance.
Unless you're comfortable taking on some significant risk here, Amwell isn't a healthcare stock you should consider buying today. There is the potential for the stock to take off given its modest valuation, but a lot depends on the success of its new Converge platform. While the results were encouraging last quarter, the company still has a long way to go to show investors that the efforts it has been making will pay off.
