The American Well Corp. (AMWL) IPO is hitting the market at the point when market excitement for telehealth has likely peaked in the short term. Even the CEO of the company warned the market to prepare for slower visits in the short-term as patients get used to regular doctor visits with masks. My investment thesis wants investors to use caution here with the stock up 50% above the original IPO price range of $15.

Image Source: Amwell website

Hot IPO

With Teladoc Health (TDOC) surging to astronomical highs after merging with Livongo Health (LVGO), a hot IPO for Amwell was easily expected. The virtual health provider priced the upsized IPO at $18, up from $14 to $16. The pricing wasn’t so astronomical, but the company did increase the shares sold from 35.0 million to 41.2 million shares.

In total, Amwell raised $742 million in gross proceeds from the deal before the over-allotment of ~6.2 million additional shares, up from only ~3.5 million. The amount raised was $204 above the original target of $538 million.

The stock opened at $25.51 providing over a $10.50 boost from the original midpoint of $15.00. The initial boost doesn’t match the crazy prices from the very hot Snowflake (SNOW) IPO where the stock doubled at the open.

The telehealth player will have a fully diluted market value of $6.2 billion with 267.4 million shares outstanding and the stock price at $23. The S-1/A lists 226.3 million shares outstanding after the offering when adding in the additional IPO shares, but the amount doesn’t include substantial stock options. Amwell has a combined 28.1 million Class A shares issued for stock options and RSU grants plus another 9.3 million Class B shares for stock options and RSU grants. With the stock surging above the IPO price, the stock options are easily in the money now with exercise prices generally below $10. The total diluted shares should reach 265.9 million shares after the company repurchases 1.5 million shares from insiders at the IPO price of $18 and before the over-allotment shares.

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For the 1H of the year, Amwell generated revenues of $122.3 million for 77% growth. The big question with this sector is whether the run rate in especially Q2 is replicated next year.

As seen with Teladoc Health, the surging visits for COVID-19 didn’t drive a similar amount of revenue growth due to a reliance on subscription fees and not usage fees. The company saw peak usage at 40,000 daily visits in April.

The stock now trades at 25x the revenue run rate of only $244.6 million. All while, the company is generating sizable losses due to the expense of developing the Amwell Platform and marketing the service to health plan and system enterprises.

Amwell monetizes the platform based mostly on recurring subscription fees along with some usage-based fees. The 2019 mix was 84% recurring revenues. While recurring revenues are appealing, the company didn’t see any real improvements to the bottom line on the surging visits due in part to higher internal costs from COVID-19. In the 1H’20, the EBITDA loss only improved slightly to a loss of $31.1 million.

Source: Amwell S-1/A

Huge Market Opportunity After A Pause

The company provides a complete digital care delivery system via The Amwell Platform to enable virtual health solutions for clients. The platform enables 150 of the nation’s largest health systems and powers digital care for 55 health plans to cover 80 million lives.

In general, the company already had massive scale heading into the coronavirus surge in visits, but in general the platform had limited demand. The platform only averaged 144,000 monthly visits during prime flu season months of January and February before demand surged to 912,000 visits at the peak in April.

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Source: Amwell S-1/A

The problem for investors is how to value a company that has already seen demand for their services collapse by 50% from the recent highs. The company gets paid generally based on the number of service providers, which continued to grow through June to 57K. The growth rate moderated significantly from May to June to only 3K additional active providers.

Even the CEO appears to agree in his interview on CNBC. In this interview, CEO Ido Schoenberg cautions investors to prepare for lower visits next year.

Ultimately, Amwell sees a market opportunity of 290 million lives and total addressable market for subscriptions at $8.7 billion for health plans and $3.7 billion for health system customers alone.

Takeaway

The key investor takeaway is that Amwell becomes an appealing story as the stock rerates lower in a more normalized market environment with lower virtual doctor visits. Investors should stay on the sidelines here.

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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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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