OptimizeRx Corporation (OPRX) is a relatively small health care company ($175 million market cap) that provides digital health point-of-care communications services. The company’s goal is to “close the communication gap between pharma, payers, physicians, and patients.”

The company provides a cloud-based solution that provides access to critical drug information, prior authorization, and financial assistance in an attempt to promote patient adherence to medications. OptimizeRx services more than 50% of the ambulatory patient market through the company’s mobile communications platform, along with leading electronic health records (EHR) platforms such as Allscripts, Amazing Charts, and Quest.

(Source: OptimizeRX)

While OptimizeRx has strong quarterly revenue growth of 46% YoY, no debt, and a cash position of $15 million, I am somewhat concerned about the company’s plummeting free cash flow margin, which has dropped from 11% in December 2019 to -23% at present.

(Source: Portfolio123/MS Paint)

The falling free cash flow margin appears to be due to a significant increase in expenditures as the company shifts towards the enterprise market, along with unspecified payments to the company’s partners.

In addition to the falling free cash flow, I am concerned about the significant increase in accounts receivable, which may be an indication that its customers were struggling during the initial stages of the pandemic.

(Source: OptimizeRX)

Despite the fact that the accounts receivables were up at the end of the quarter, the management has not indicated that there is a problem collecting money from customers (yet).

“To-date we have not seen any pharma programs eliminated or decreased. But I’m sure the executives are all watching events unfold. And we are ready to adjust if need be. There is no question that office visits are down markedly from late February. Some have said between 25% and 60%, depending upon specialty.”

While I like OptimizeRx’s positioning in digital health care services, I am sufficiently concerned about the company’s falling free cash flow and rising accounts receivables that I am revising my previous bullish rating to neutral. I am taking a wait-and-see attitude with this company. They need to demonstrate that they are thriving in this environment as opposed to treading water, something that isn’t clear to me.

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The Rule Of 40

One industry metric that is often used for software companies is the Rule of 40. The rule provides a single metric for evaluating both high-growth companies that aren’t profitable and mature companies that have lower growth but are profitable. Revenue growth and profitability (expressed as a margin) must add up to at least 40% in order to fulfill the rule. Analysts use various figures for profitability. I use the free cash flow margin.

The rationale for the Rule of 40 is as follows. If a company grows by more than 40% annually, then you can tolerate some level of negative free cash flow. But if a company grows by less than 40%, then it should have a positive free cash flow to make up for the less-than-ideal growth. This rule accommodates both young, high-growth companies as well as mature, moderate-growth companies. The 40% threshold is somewhat arbitrary but typically divides the digital transformation stock universe in half, separating the best stocks from the so-so ones.

For a further description of the rule and calculation, please refer to a previous article I have written.

The two factors required for calculating the Rule of 40 are revenue growth and free cash flow margin. OptimizeRx’s annual revenue growth for the last year was 20%, while its free cash flow margin was -23% (shown previously in this article). I am going to give the company some grace by using the long-term revenue CAGR of 47% as opposed to the last annual growth rate of 20% for the calculation.

(Source: OptimizeRX)

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Therefore, the Rule of 40 calculation for OptimizeRx is as follows:

Revenue Growth + FCF margin = 47% – 23% = 24%

OptimizeRx’s score does not fulfill the Rule of 40, suggesting that OptimizeRx has work to do in order to achieve a healthy balance between growth and profitability.

Stock Valuation

The plot below illustrates how OptimizeRx stacks up against the other stocks on a relative basis based on forward sales multiple versus forward revenue growth. Note: please refer to a recent article for more information on the scatter plot relative valuation technique.

(Source: Portfolio123/private software)

According to the scatter plot, OptimizeRX is quite undervalued on a relative basis relative to its peers. The fact that Mr. Market is pricing OptimizeRx so low suggests that there may be an underlying problem that perhaps I am not seeing.

Summary and Conclusions

In theory, OptimizeRx is ideally positioned to capitalize on the pandemic and shift towards remote health care. But theory and practice are often two different things.

Did you know that there has been a dramatic drop in cancer diagnoses? The public has simply stopped going to the doctor! And rural hospitals are shuttering at an alarming pace.

This likely translates into fewer prescriptions being filled, and hence less messaging between doctor, pharmacist, and patient. At this point in time, it is difficult to determine whether OptimizeRx is thriving or treading water. What is known is that OptimizeRx’s margins are falling, with the free cash flow margin plummeting from 10% to -23% in less than one year. Accounts receivables are up YoY in the latest quarter, suggesting that customers may be struggling to make payments.

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OptimizeRx’s stock price is extremely undervalued by the market relative to its software peers. This unto itself is not a good reason to invest as there may be a reason for the low valuation. I would like to see how this company performs in the next quarter before giving it a bullish rating. At present, my rating is neutral.

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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.