For investors, there are few things sweeter than a company that's capable of building its bottom line year after year despite taking risks by entering new lines of business to keep growth going. In early 2028, pharmacy chain Walgreens Boots Alliance (WBA -0.23%) will likely be a larger and more diversified business, assuming its foray into primary care goes according to plan.
But if its entry into new markets hits a speed bump, it could leave the door open for competitors to eat its lunch. So, what'll happen to Walgreens over the pivotal period of the next five years? Let's find out by mapping out its objectives and its recent progress toward them.
Where it's headed right now
The pharmacy company finds itself in the midst of an attempt to diversify into providing healthcare services like primary care during a time when its top and bottom lines are looking somewhat weak. Take a look at this chart:
WBA Revenue (Quarterly) data by YCharts
As you can see, both its quarterly revenue and net income haven't shown much sign of improvement over the last five years. The idea behind starting up primary care clinics is to shore up revenue growth in the near term. At the same time, it plans to cut its costs and trim its investments to pay for the new revenue sources, which could result in some improvements to its margin.
That'll be key as right now it's narrowly unprofitable, and investors will be expecting its dividend to keep growing like it's done consistently each year for longer than a decade. Currently, its forward dividend yield is around 5.2%, which is on the high side.
Eventually, Walgreens sees its push into healthcare culminating in having a solution in place at each link in the care chain. That means consumers could get preventative care and routine wellness products from its pharmacies, primary care from its VillageMD clinics, specialty care from its other subsidiaries, and follow-up care administered via digital platforms.
Building up all of those capabilities will take time. Having a large portion of a person's healthcare needs addressable via one unified Walgreens ecosystem will lower the friction associated with seeking care in the first place, thereby guarding and expanding revenue simultaneously.
For 2023, management expects the healthcare segment to bring in as much as $7 billion. Such a sum won't move the needle, given that the business has trailing-12-month revenue of more than $132.1 billion, but if it keeps growing rapidly, it won't be long before it does. In fiscal 2025, management is aiming for between $14.5 billion and $16 billion in sales from healthcare services.
And by the end of 2023, providing those services is anticipated to yield positive earnings before interest, taxes, depreciation, and amortization (EBITDA) on an adjusted accounting basis.
Is the stock a smart investment now?
Given these projections, it won't take very long for investors to be able to evaluate whether management's plan to diversify is working as intended. And if the plan is indeed working, it won't be a drag on the bottom line for much longer. By 2028, the company could have a major share of the primary care market in addition to its share of the pharmacy services market.
But there are a few obstacles between now and then, all of which relate to competition. Larger, more powerful pharmacy competitors like CVS Health are also branching out into providing healthcare, not to mention insurance.
So Walgreens will need to compete for clinical staff, which could mean paying them more, and it might also be forced to price its services aggressively to retain and grow its market share. Furthermore, the company might get scooped when it comes to buying out appealing acquisition targets within healthcare.
Then there's the elephant in the room. Pharmacy services and primary healthcare are not markets that are likely to see massive growth in the next few years. People aren't about to suddenly need dramatically more prescription drug access or primary care services, and population growth won't make a difference on such short time scales.
Even if it can finagle growing slowly and barely profitably, the stock is unlikely to beat the market. Five years from now, that will probably still be true as it's incredibly difficult to expand quickly once it takes tens of billions of dollars in additional revenue to make a difference in the top line.
In 2028, it'll have a much larger healthcare footprint, but its margins will need to expand quite a bit between now and then for the footprint to matter, and management hasn't outlined a realistic plan for doing so. Therefore, it's probably best to avoid buying Walgreens stock anytime soon if you're a growth investor.
