GoodRx Will Be OK, Despite Fears About Amazon Pharmacy

GoodRx Holdings (NASDAQ:GDRX) has been falling recently due to fears about the new Amazon (NASDAQ:AMZN) Pharmacy online business. The fear is that online mail-order drug deliveries will hurt GoodRx’s prescription discount business. As a result, GoodRx stock tumbled 23% in the last month. At today’s price, it looks like a reasonable value.

Magnifying glass looking at the GoodRx logo on the company Website
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But not to worry, GoodRx doesn’t think Amazon is a threat. This might actually be a good time to pick up some shares in the company.

In fact, the company’s recent earnings release provides a lot of confidence for investors. GoodRx produced its first quarterly results as a public company and showed excellent growth and profits.

More Active Customers, More Profits

GoodRx posted powerful Q3 results on Nov. 12, including 38% higher revenue at $138 million compared to the prior-year quarter. GoodRx makes money by getting a referral fee from Pharmacy Benefits Managers (PBMs) whenever a drug is filled using a GoodRx code by customers. Customers sign up for the GoodRx app and get a discount on their drugs using a GoodRx code.

So, in effect, the company has no real cost of goods sold. It simply needs to keep on signing up more customers, whatever that costs. So, inherently this is a profitable business model.

Therefore, its profits are high, as a percent of sales. For example, GoodRx made adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $53.15 million during the third quarter. That represents 37.8% of sales, an extremely high margin.

For example, most retail or distribution businesses would be lucky to make a 5% or higher EBITDA margin. I should know as I consult for these types of companies and help them strategically analyze their businesses.

Moreover, GoodRx posted $35.6 million in adjusted net income for the quarter. It was “adjusted” to take out the non-cash charges that most companies today end up taking out of their GAAP earnings – things like stock-based compensation expenses (SBC). The point is GoodRx is fundamentally extremely profitable.

It relates to the growth in its active customer base – discount drug users who download the GoodRx app and use their codes. The PBMs pay a referral fee to GoodRx for these “active consumers,” which now number 4.895 million, up 29% year-over-year.

No Worries About Amazon Pharmacy

Barron’s recently posted an online interview with one of the co-founders of GoodRx, CEO Doug Hirsch, based in Santa Monica. The magazine wanted to know how GoodRx felt about the entry of Amazon into the discount drug business.

The short answer is that GoodRx is not worried. Hirsch described the company as the “Switzerland” of the pharmacy business, working with all the various players in the discount drug business. For example, they even partner with Amazon in some respects, including working with their PBMs.

Moreover, the fundamental fact is that people like talking to their pharmacist. It is sort of like a “mini-doctor visit” for many people. That means that the online mail-delivery drug business may not be all that it is cracked up to be, at least by Amazon.

What To Do With GoodRx Stock

Analysts estimate earnings per share (EPS) will hit 5 cents in 2021 and 30 cents by 2022. That puts the stock on a forward multiple of 126x earnings. Most investors are likely looking out to 2023 or 2024 in terms of earnings, short of a recession.

Moreover, the price-sales ratio is 20x sales for 2021 and almost half that for 2022. These are not cheap prices, at least on the surface.

However, keep this in mind. In the first nine months of 2020, the company generated $116.5 million in cash flow from operations (CFFO), as well as $100.81 million in free cash flow (FCF). That works out to a FCF margin of 25% or higher.

Therefore, by the end of 2022 with close to$1 billion in revenue, the company will produce over $250 to $300 million in free cash flow and up to $400 million by 2023. That can justify a $15 billion market value at its present price of $37.89 per share. This is especially true since the company will have over $1.5 billion in cash at that time.

However, it does not leave a lot of room for upside, at least right now. If growth continues to surprise, then it might be possible to see GoodRx stock worth a higher price, but at least not right now.

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.

Mark Hake runs the Total Yield Value Guide which you can review here.

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