GoodRx Holdings (GDRX -0.31%) helps consumers save on prescription medications through its coupons, which are accepted at thousands of pharmacies across the country. Its service is entirely free to customers, and coupons are easily accessible via an app, email, and can also just be printed out.
The company has been generating strong growth numbers, but next quarter could be a different story as GoodRx says that an unnamed grocery chain has made policy changes which will result in its accepting fewer discounts. The already-struggling stock tanked on the news and hasn't recovered since.
But that doesn't mean the business is going to stop growing over the long term. Should investors add GoodRx to their portfolios and take a contrarian position, or is there simply too much risk involved with the business today?
The case for buying GoodRx
GoodRx's platform gives consumers the ability to track prescription prices across more than 70,000 pharmacies that accept its coupons across the U.S. The healthcare company notes that price differences can be significant (more than $100 in some cases), thus giving plenty of incentives for people to use its platform.
Over the past three years, GoodRx's growth has been fairly strong with its quarterly sales numbers rising by at least 20%. And amid inflation, there's reason to continue being optimistic about the business as more people try to utilize its discounts in order to save money.
GDRX Revenue (Quarterly YOY Growth) data by YCharts.
But for the latest quarter (ended in June), GoodRx's sales are expected to drop, because the company said a key grocer took "actions that impacted acceptance of discounts from most PBMs for a subset of drugs." This has impacted more companies than just GoodRx, but it could be a significant hit to its financials.
The company provided a rough estimate that revenue could take a hit of $30 million, bringing its top line down to about $190 million for the period. GoodRx also cautioned that it was difficult to forecast the effect because the issue came up late during the first quarter.
But expectations of a horrible quarter are likely baked into the current stock price. So unless the company does a whole lot worse than its initial forecast (GoodRx hasn't released any news since that would suggest this would be the case), it's possible that the stock ends up rallying after earnings, even if its sales decline.
And although investors hold a bearish view of the situation right now, there's nothing to suggest that the problem couldn't be sorted out over the long term.
The case for not buying GoodRx
Sales growth aside, there are other concerns that investors need to consider with GoodRx's business. For one, the company isn't profitable. Despite gross profit margins that are up over 90%, the company's overhead and operating expenses are steep. Over the trailing 12 months, GoodRx's operating income of $38 million was less than 5% of its top line.
A lack of profitability can be concerning in the current bear market as investors are gravitating more toward safe stocks and businesses that have a more stable trajectory. GoodRx's forward price-to-earnings multiple of 23 is already higher than the 16 multiple for the average stock in the Health Care Select Sector SPDR Fund. And this is before analysts can accurately adjust for the impact of the unnamed grocer's policy changes on its financials; GoodRx's valuation could look even worse once there's an updated forecast.
There are more reasons to buy than sell
GoodRx is facing some challenges right now, but its strong financials should help it handle the adversity. Its cash and cash equivalents balance of $845 million is sufficient to pay for all of its liabilities, and the business also generates free cash flow. The stock has rallied from its 52-week lows, and it may have already hit bottom.
While it could still drop in value, GoodRx is in an excellent position to rally in the back half of 2022 and beyond. For a clearer picture of where the company is right now, investors may want to wait until the latest earnings numbers come out. However, the business' solid cash balance, coupled with strong growth potential, make it an attractive underdog stock to buy right now.
