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1Life Healthcare Inc.: Transforming Pandemic Disruption Into A Catalyst For Growth (NASDAQ:ONEM)

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In time, the lasting impacts of the COVID-19 pandemic will be studied and documented across every academic discipline. The virus has become a singular catalyst for change across all facets of life. Never before has a seismic shift of this magnitude been felt so quickly on a global level.

COVID-19 has now become the ultimate disruptor. Take Amazon’s (AMZN) effect on brick and mortar retail, and multiply it across every business worldwide. For many, the virus will have significant impacts to near-term growth. For some, the impacts will be too much to overcome. For a select few, the virus becomes a catalyst for fueling growth. 1Life Healthcare (ONEM) is positioned for latter.

Leading up to the IPO launch in late January of this year, 1Life’s unique play in the primary care space generated quite a buzz. ONEM’s innovative revenue model employs a multi-faceted approach to primary care, with access only granted via a membership-based gateway.

In addition to annual membership fees, 1Life leverages their proprietary software solutions (telehealth and population health) across 70-plus primary care/testing locations. This strategy led to year-over-year growth of 25% in both memberships and net patient service revenues.

We envision COVID-19’s impact having a multiplier effect on long-term growth for 1Life. As the lasting impact of the virus reshapes the healthcare marketplace, present day transitory headwinds experienced in the first half of 2020 will subside. The reverse is likely to occur in the second half of 2020 and beyond. Secular trends will eventually become tailwinds, enhancing the growth trajectory currently experienced (estimated) by 1Life.

How will a post COVID-19 health care marketplace help serve as both a near-term and long-term growth catalyst?

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Management referenced a significant amount of pent-up demand on their most recent earnings call. Pent-up demand in the system, coupled with an increase in the rate of speed at which telehealth is being adopted, increases the probability for upward revisions to future revenue/earnings estimates. We believe these trends could begin having an impact as soon as Q3 2020.

Most importantly, trends put in motion by the pandemic will have an accretive benefit to the growth strategy already in place at 1Life. ONEM is expanding to markets in Atlanta, Orange County and Austin. The company plans to build 20 to 25 locations in 2020. Increasing the footprint of the ONEM continues to be a key metric to watch. Partnerships and the goodwill created by 1Life during COVID-19 already are paying off in the form of additional organic growth within the key markets of New York City and San Francisco.

As the footprint for 1Life broadens, so do the number of memberships. Annual memberships run $199/year, making up +19% of Q1 2020. Memberships are growing upwards of 27% per year. Management expects to finish the year with 500,000 to 515,000 memberships and relationships with over 7,000 employers.

We are expecting to see memberships at 1Life growing at a brisker pace than consensus. The quarantine has changed the way we work, changed the way we teach, and also is changing the way we consume healthcare. COVID-19 is quickening the pace at which the consumer is adopting a telehealth-driven primary care system.

Those skeptical of the recent breakout will argue that management pointed out headwinds felt in Q1. Headwinds that are expected to persist in Q2. Any significant extension to quarantines in New York City and San Francisco markets would drag down Q2 and potentially linger into Q3.

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Over the years, investors have learned the hard way how regulatory risks can lead to immediate valuation impacts. 1Life is subject to these same regulatory/reimbursement risks, but in a muted fashion when compared to other providers in the space. Almost 20% of ONEM’s revenues coming from annual memberships. A material portion of 1Life’s revenue has a 90% retention rate attached to it. With little variability, the membership revenue vertical helps buoy other downside risks present in our long-term forecasts.

Lastly, let’s take a look at the chart for 1Life. Technical analysis/charting is the primary tool I use when determining my entry or exit point for an equity position that has successfully completed our stock selection process.

The IPO stumbled a bit out of the gates, but that didn’t last very long. As you can see, the stock is currently on a meteoric rise (climbing another 11% earlier this week). The current breakout coincided with the well-received Q1 2020 earnings call held on May 13. This also ended up being the day that I made an initial purchase for our Gunderson Emerging Growth portfolio strategy.

One natural phenomena of the IPO life cycle is the softness observed in share price as the end of the share “lockup” approaches. This will occur for 1Life on July 29, 2020. Be on the look out for entry points in ONEM along the way.

As the vast majority of my followers know, I’m very cautious about purchasing stocks that have had their IPO within the last 12 months. I prefer others pay the early premium to drive the new car off the lot.

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1Life is a disruptive force in a COVID-19 disrupted healthcare sector. ONEM’s innovative model blends telehealth and in-person care. By wrapping these services in a subscription revenue model, 1Life is cushioning themselves from possible regulatory risks and reimbursement shocks to future earnings. We have a Very Bullish rating on 1Life Healthcare.

Looking forward to watching this story unfold… stay tuned.

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Disclosure: I am/we are long ONEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I collaborated with my Gunderson Capital Management colleague, Barry Kyte Jr., CFA, on this article.

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