Amwell (AMWL) is an interesting telehealth company which shows impressive growth rates which approximate 100% as the result of Covid-19. Telehealth is very hot space yet unlike some industry leaders the pre-Covid-19 growth was not so impressive to me, certainly in combination with sizable losses.

For this reason shares probably trade at a discount vs. its peers as this discount does not induce me to get onboard. Given slower growth and losses, although I will most certainly keep a close eye on the shares here.

Telehealth Play

Amwell is a telehealth company which enables digital delivery of care. The company has created a digital care delivery solution, which it calls the Amwell Platform, allowing clients to develop and distribute own telehealth programs.

By mid-2020 the company powers 55 digital care programs which covers 36,000 employers and more than 80 million covered lives in the US. Given these large numbers, the company has great relationships and while the number of covered lives is very large, of course these clients typically drive relative low visit numbers, although that changed amidst Covid-19.

Limited choice, access and a fragmented and inefficient care industry illustrates the drawbacks of the current healthcare industry. The industry is evolving to provide better care at lower costs as innovative business models and new regulatory frameworks promote savvy solutions, such as the one provided by Amwell. Amwell’s solutions among others include primary and urgent care, both on-demand and scheduled.

Providers of care can furthermore launch the service direct from the Electronic Health Record as the platform holds conferences by mobile, web, phone or even proprietary kiosks. Even the big names in the world use integration with Amwell’s service including Cerner, Apple and Philips.

IPO, Pricing Process & Valuations

Originally the company and its advisors anticipated to sell 35 million shares in a price range between $14 and $16 per share as solid demand resulted in pricing being set at $18 per share, resulting in gross proceeds of $630 million in connection to the offering.

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With little over 220 million shares outstanding following the offering, the equity valuation comes in just shy of $4.0 billion as a pro-forma net cash position in excess of $900 million translates into an enterprise value around $3.0 billion. This was ahead of the opening day jump as shares haven now settled around $23 per share. At these levels the market value jumped to around $5 billion and operating asset trade around $4 billion.

If we look at the actual financial performance the picture is quite mixed. For the year 2018 the company generated $114 million in revenues on which an operating loss of $55 million was reported. Revenues rose 30% last year to $149 million yet operating losses rose to $95 million as losses rose quicker in dollar terms than topline sales.

The business enjoyed a big boost in the first half of this year as revenues rose 77% to $123 million, driven by the compact of Covid-19 and the impact of the acquisition of Aligned Telehealth, announced late in 2019. It was quite disappointing to see operating losses increase from $45 million to $113 million, not just increasing on an absolute basis, but up on a relative basis a well.

This loss was driven by general and administrative costs nearly quadrupling to $95 million. This was due to stock-based compensation increasing from $5 million to $72 million, potentially as a result of the upcoming IPO and incentives given to executives, as otherwise some operating leverage would have been demonstrated on.

If we zoom in on the second quarter results, revenue growth accelerated to 94% as revenues came in at $69 million, or basically $265 million on an annualized basis. On that metric, shares trade around 15 times sales, yet it is very evident that growth is driven by Covid-19. Adjusted for executive grants operating losses still come in around the tune of $100 million a year.

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Some Thoughts

We have quite some peers in this field as Teladoc Health (TDOC) and Livongo Health (LVGO) announced a mega-merger in August, which I covered in this article. The 15 times annualized multiple in combination with 94% revenue growth (to an unknown extent boosted by an acquisition) looked favorable compared to these two giants (at least in their field). Teladoc traded at nearly 20 times annualised sales and reported 85% revenue growth with revenues trending around a billion. In this light the valuation of Amwell looks good, if not for the fact that it reports big losses while Teladoc is reporting flattish results on the bottom line.

Livongo was quite a bit smaller with revenues at an annualised basis trending just above those of Amwell, yet growth of 125% was a bit more impressive as the company is profitable as well. Nonetheless, the Teladoc merger valued its operations around 40 times annualised sales, nearly 3 times the multiple at which Amwell trades, albeit Amwell reports slower growth and accompanied losses.

While the company might look compelling on relative valuations, absolute valuations are very high, but moreover the question is what the real growth rate is. After all the annual growth rate tripled in the second quarter of this year to >90% after growing 30% last year, obviously thanks to Covid-19. A reversal of this impressive growth could leave investors with a painful surprise. Other risks include a competitive field, larger and well-capitalised competitors, and continued losses.

On Covid-19, we have some numbers provided in the S1-filing suggesting that daily visits came in at 2,900 in April 2019, averaged at 5,500 in January and February of this year, and peaked at 40,000 this April, with visits down substantially now. Total visits came in at 912,000 for the month of April, but by June had fallen back to 540,000 already, and probably trend lower than that this at the moment.

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Weighing the fact that greatest momentum might be behind us already and that relative sales multiples look modest on a comparable basis, while growth rates are fairly similar, there are some pro’s and con’s to the story. The con is of course the big cash burn as the company is losing quite some money in contradiction to Livongo and Teladoc, for instance.

On the other hand there is a silver lining as well as Google invested $100 million just a few weeks ago at $15 per share, not just as a financial investment yet a strategic investment as well. With Google having acquired Fitbit among others, it shows the commitment of Google to the field.

Putting it all together, I am constructive on the relative valuation and the potential of the industry and while I am not actively initiating a position here, I look forward to adding on dips if they arise, and anxiously looking forward to current trends in the third quarter.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.



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