American Well Corp. (NYSE:AMWL) went public on the New York Stock Exchange on Sept. 21 at $18 per share and now trades at $21.60. That’s a gain of 20% for AMWL stock, but in reality, it represents a very high valuation.
Most of the good news for years to come seems imbedded in the stock, leaving little room for upside.
The truth is that AMWL, a national telehealth stock, is trying to copy the high valuations other telehealth stocks now have. For example, American Well, or Amwell as its colloquially known, powers the digital health delivery systems of 55 health plans. Its revenue is estimated to be about $232 million for 2020.
We can use that to analyze Amwell’s valuation.
Everything Is Relative
Here is the issue. The market capitalization for AMWL stock is $5.59 billion. This is because there were 234.955 million of all three of its share classes outstanding as of the end of Oct. 2020, according to its latest 10-Q filing.
Therefore, this puts AMWL stock at 24x sales (i.e., $5.59 billion divided by $232 million). That multiple is usually the kind of ratio used in a price-earnings (P/E) metric. That is what is so absurd about this situation.
But I guess if your neighbor can have a high-priced house, maybe yours is worth a lot too. For example, Teladoc Health (NYSE:TDOC) has a $27.1 billion market cap and its estimated 2020 sales are $1.12 billion. That puts the price-sales ratio at 24.6x. That is likely why the market accepts the high valuation (24x) for AMWL stock.
Valuing Amwell Using Price-Sales
But here is the thing. Analysts estimate that 2022 sales for Teladoc Health will be 74% higher at $1.95 billion. At least that lowers the forward lowers the P/S ratio to 13.9x.
But analysts are not as sanguine about Amwell’s projected sales growth. For example, Yahoo! Finance puts it just 12.6% higher at $261 million. This is similar to 2021 revenue projections at Seeking Alpha. Therefore, the 2021 P/S ratio is still high at 21x revenue (i.e., $5.59 billion divided by $261 million).
The point is that this implies that the stock might actually be worth much less. For example, using Teledoc’s 14x P/S ratio for 2o21 on Amwell’s 2021 forecast puts the AMWL stock at a market cap of just $3.654 billion. That is found by multiplying 14 x $261 million.
Therefore, Amwell is vulnerable to a 35% fall from here (i.e., $3.654 billion/$5.59 billion market cap. That means AMWL stock should be trading at $15.55, not $21.60.
What To Do With AMWL Stock
Maybe we can forget all this P/S valuation nonsense if the company is profitable or about to be profitable.
Sorry. That is not the case here. The company makes a 32% gross margin on its sales which leaves no room for profits or even EBITDA (earnings before interest, taxes, depreciation, and amortization). Granted analysts project lower losses next year and lower negative EBITDA numbers, but I suspect it is going to be several years before meaningful profits occur, if at all.
For example, people could return to their doctor for regular visits after the various vaccines are widespread. This could drastically slow down Amwell’s revenue growth and loss turnaround projections.
And don’t forget that this stock’s high valuation has none of those risks implied in the valuation for AMWL stock. This might explain why it fell over 18% on Nov. 13, right after earnings came out. Investors realized AMWL stock was too high.
Nevertheless, you should be aware that Wall Street analysts are still extremely positive on the stock. For example, prior to the earnings release, TipRanks reports that eight analysts have a price target of $37.14. That is 56% above today’s price. However, I highly suspect that in several months the average price target might be much lower.
Therefore, I think most investors will want to watch the company first and see if it deserves a higher rating as its revenue grows. It will be important to be able to forecast a timeline for positive EBTIDA profits within a year forward.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.