Is this distressed growth stock about to make a comeback?

If you have the guts to do it, buying a stock that other investors look down on can be a great way to pick up shares of solid companies at a bargain price. If fortunes turn, you’ll become the proud contrarian who saw the company’s true potential as a bonus – assuming its fortunes do round.

After dropping more than 80% in the past year, it’s no exaggeration to say that GoodRxit is (GDRX -5.02%) stock is a battered shadow of his former self. In case you weren’t aware, the company helps people save money on prescription drugs.

why is it distressed

GoodRx is a growth-stage company, and fixing prescription drug inefficiencies in the healthcare system is a core component of its business model. It achieves this by negotiating with Pharmacy Benefit Managers (PBMs) and pharmaceutical drug manufacturers and reducing inefficiencies that increase their costs – excluding potential customers from the market. Then the company takes a share of the savings and passes it on to the patients.

Its 12-month sales are nearly $788.3 million, and unfortunately, that’s where the trouble begins. For a growth title, it just doesn’t grow very quickly. Over the past three years, its quarterly revenue has grown nearly 100%, but its sales from prescription transactions and pharmacy management solutions have actually contracted quarter-over-quarter between the end of 2021 and the first three months of 2022.

This could mean that it is reaching the end of easily correctable inefficiencies for its stakeholders or that its consumer market penetration for low-cost prescriptions is plateauing. Both would be bad news, and both would result in deteriorating margins. On that note, take a look at this table:

Total GDRX expenses (% of quarterly revenue). Data by Y charts.

As you can see, since the end of 2019, its total expenses; selling, general and administrative (SG&A) expenses; research and development expenses and cost of goods sold all rose quite significantly as a proportion of quarterly revenue, causing the company’s profit margin to collapse. When you add in the market’s bitter sentiment about growth stocks this year so far, GoodRx’s stock decline isn’t much of a mystery.

things are looking up

The good news is that GoodRx is improving and the recent slowdown in its revenue growth may soon prove to be just a bump in the road. About 80% of people who try its prescription savings program end up using it again at some point, and its service has about 6.4 million monthly active users. It grew its monthly active user base by 12% over the past year, and it also added 29% to its base of paid subscription plans, in which consumers pay a nominal fee for discounts on even more important orders.

The growth in its user base and paid subscribers means that its revenue base will be highly recurring, which would help to mitigate some of the impact of an overall slowdown in growth. It is also a sign that it has not yet fully penetrated its target markets, which is a major positive point.

Additionally, while consistent profitability remains an issue, its total expenses have dropped significantly as a percentage of quarterly revenue since the first quarter of 2021, so its efficiency is improving.

And its valuation is significantly lower than it was a few years ago. While its price/sales multiple was above 42 just after its IPO at the end of 2020, it is now around 4.2 and activity is significantly stronger. In today’s market, this valuation won’t be a big draw for new investors, but it won’t be a barrier to price appreciation as it might have been a year ago.

In short, there are some indications of progress toward a comeback for GoodRx, but its shares could take a long time to recover, especially if its margin improvements stall along the way. For aggressive investors, it’s worth buying today at its cheaper valuation, but for those with medium risk tolerance, it’s a better idea to follow up in a few quarters to see if things are on the right track before taking the plunge.

About Barbara J. Ross

Check Also

ADI Stock: Is Analog Devices a Good Buy Before Earnings?

Analog Devices, Inc. (NASDAQ: ADI) is on a mission to bridge the physical and digital …