Investment Thesis

GoHealth (GOCO) is a health insurance marketplace. Even though its revenue growth rates are somewhat unsteady, GoHealth more than makes up for its slowing growth rates, with very high EBITDA margins.

The stock is not expensively priced at 4.6x forward sales.

Revenue Growth Rates Are Losing Momentum

GoHealth is a health insurance website offering plans that allow customers to compare insurance options. Its mission is to help individuals find the best health insurance plan for their specific needs.

Source: Press statements, earnings calls, SEC filings, **high-end company guidance

In the graph above, we can see that in 2019 GoHealth was growing at 139% y/y.

Then, during 2020, even though GoHealth admits that COVID helped accelerate the secular shift towards its business model, there has been a steady deceleration in topline growth rates.

From Q1 2020 where its revenues growth rates were 104% to Q2 2020 GoHealth’s revenue growth rates had a 30 percent sequential drop in revenue growth rates to 71%.

Even if we factor in the licensing delays GoHeath experienced from April to June, this does not entirely justify why its 2020 revenue growth rates at the high end, best case scenario, are likely to finish with 65% revenue growth rates, when 2019 finished with 139% revenue growth rates.

In other words, in the space of twelve months, its revenue growth rates essentially halved. At this juncture, investors have little options but to question what GoHealth’s revenue growth rates are likely to shape up in 2021?

For a company whose rhetoric is one of a disruption in a convoluted marketplace, this sort of growth rate trend points is in the opposite direction from what investors would expect.

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Source: Q2 2020 Investor Presentation

What’s more, as we can see above, GoHealth holds less than a 1% market share of its $28 billion total addressable market.

Bullish Thesis Can Look Towards Passionate Users and Very High-Profit Margins

(source)

Shareholders can feel reassured that GoHealth has a resilient moat, as more than 11K reviews on Trustpilot leave the company rated at 4.8 out of 5.

Moreover, this plays a role in GoHealth having very high internal conversion rates. In fact, approximately 70% of GoHealth’s customer acquisitions are from internal sources, either through sales teams or on a self-serve basis.

In turn, this lends itself towards GoHealth’s conversion rates approximating 35% of leads.

Source: Q2 2020 Investor Presentation

Valuation –Not Expensively Priced

Assuming that GoHealth goes on to have a very strong finish to 2020, its revenues may reach $900 million. Note, this is above its high-end guided growth rate.

With those revenues, investors today would be willing to pay approximately 4.6x forward sales, which is not a large multiple by any stretch.

Having said that, if we compare with SelectQuote (SLQT), a close peer of GoHealth, that company is priced at less than 4x its own forward sales.

On the other hand, SelectQuote’s guided EBITDA margins are pointing at the high end to reach 26%, whereas GoHealth’s high-end EBITDA margins are pointing towards 33% for its full-year 2020.

The Bottom Line

GoHealth is being priced at 4.6x forward sales, even though at the high end of its EBITDA guidance, its aiming for 33% EBITDA margins.

Presently, in the market investors are feverishly dashing for growth opportunities, and willing to bid very high multiples for a myriad of SaaS (Software-as-a-Service) companies although they are guiding for sub 30% growth rates.

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Meanwhile, GoHeath is eyeing up plus 50% growth rates, even if it is rapidly decelerating. Nevertheless, it’s difficult to argue that its stock is overpriced.

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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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