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Investment thesis

The WELL Health Technologies (OTCPK:WLYYF) stock price has done well in the past few years as investors applaud the company’s strong growth and large market opportunity in Canada and the US. The Toronto-listed stock has risen by about 3,000% in the past five years. This performance was significantly better than Nasdaq 100 and Teladoc (TDOC).

Recently, however, the stock has lost the bullish momentum and has slipped by about 54% from its highest point this year. This performance mirrors that of other growth stocks and those in the virtual care industry like InnovAge (INNV) and Teladoc.

In this article, I will explain why I believe that WELL Health has a long runway for growth and why the current decline leaves a company that is relatively cheap.

Strong growth momentum

WELL Health is an omni-channel healthcare company that was established in 2010 by Hamed Shahbazi. Prior to starting Well, Hamed founded a bill payment company that was acquired by PayPal (PYPL) in a $213 million deal.

WELL offers both virtual and physical healthcare solutions in the US and Canada. Its tech platform helps medical practitioners in and out of its network simplify the care process. Its virtual platform provides them with tools that include end-to-end management, patient management, virtual care, and digital engagement solutions.

Further, WELL Health operates a large chain of 74 outpatient clinics that provide multiple solutions in both Canada and the US. According to the CEO, the firm is a top 3 telehealth and Electronic Medical Records company in the world.

As such, the company provides services in industries that have a large total addressable market. For example, it is estimated that the global EMR industry is worth approximately $28 billion and is expected to reach $48 billion in 2028.

Acquisitions helping growth

WELL Health has been in strong growth in the past few years, helped by about 20 acquisitions. For example, in 2021, the firm acquired CRH Medical in a deal worth about $369 million. CRH is an American company that provides solutions for the treatment of gastrointestinal diseases. Other companies the firm has acquired include WISP, Uptown Health, MyHealth, CognisantMD, and Jasper Anesthesia Care.

I am not a big fan of growth through acquisitions. In fact, this is one reason I have been critical of a company like Salesforce (CRM). However, I believe that some of these purchases will help WELL Health establish itself as a leading player in the healthcare industry in two leading markets.

We are already seeing some of these results. For example, on an annual basis, the company’s total revenue rose to $239 million in 2021 from the previous year’s $39.5 million. Notably, its EBITDA turned positive for the first time on record in 2021. In total, the management believes that the firm could get to $1 billion in revenues in the next four to five years.

In the most recent quarter, the company’s total revenue rose to $91.5 million from just $13.5 million a year earlier. It also achieved made a positive EBITDA in the past three straight quarters. This is further evidence that the acquisitions are helping the firm achieve growth without compromising its balance sheet.

In a recent statement, the company announced that it expects to publish strong first-quarter results. The firm said that it attended to 772,000 omni-channel patients in Q1, about 62% from the same period in 2021.

I believe that its omni-channel model will be beneficial as the US and Canada move from the Covid-19 pandemic. For example, its virtual services business is seeing over 50% growth rate. Its Q1 revenue is expected to be about $120 million and its adjusted EBITDA to be at $20 million. The CEO said:

“Patient visits are a strong leading indicator for WELL’s business. This report confirms that WELL continues to execute operationally and be favorably positioned to continue to grow organically and inorganically.”

WELL is not Teladoc

One reason why the WELL Health Technologies stock has retreated sharply this year is that investors are putting it in the same category as Teladoc. Teladoc stock price has collapsed from over $300 in 2021 to just $31 as investors have worried about growth.

Analysts also believe that like Teladoc, WELL Health will underperform as the economy reopens. However, I believe that this case is misguided. For one, unlike Teladoc, WELL Health uses an omnichannel method, meaning that its business is a bit hedged.

At the same time, some of its businesses are a bit niche in nature. For example, its acquisition of Jasper Anesthesia Care and Utah Anesthesia will improve its market share in these small but fast-growing industries. In the US, it is focusing on industries like women’s health, gastroenterology, and primary care.

Further, it seems like WELL Health is having a stronger organic growth than its peers. In its most recent statement, the firm’s CEO said:

“Our organic growth remained strong in Q4 at over 10% for the entire business. This strong growth was driven through our services business with over 50% organic growth, which we believe is sustainable and will lead our overall organic growth story in 2022 and beyond.”

Short-term volatility expected

While I remain optimistic about WELL Health, I expect that the stock will continue to be a bit volatile as concerns about monetary policy continue. For example, looking at the weekly chart, we see that things are not looking good. The 50-week and 100-week moving averages are about to make a bearish crossover while the stock is stuck below the 50% Fibonacci Retracement level.

It also formed a triple-top pattern, which is usually a bearish sign. Therefore, while the short-term situation is expected to be volatile, I expect that the undervalued stock will bounce back in the long term.

WELL Health chart (TradingView)

WELL Health Valuation

WELL Health’s valuation has become more attractive during the current market sell-off. The company’s market cap has retreated to about $717 million while it generated a total revenue of over $239 million in 2021. This implies a trailing P/S multiple of about 3, which is reasonable for a company that is seeing strong growth.

For 2022, the management believes that the company will generate over $500 million in total revenue, further lowering its forward P/S multiple. Additionally, WELL Health is expected to be net profitable starting from this year.

Therefore, while WELL is not cheap from an earnings point of view, its strong growth will help to support a relatively rich valuation. Some of the key assets that are providing this growth momentum are Circle Medical and WISP, which are expected to have an annual revenue rate of over $100 million this year.

Risks to the thesis

While I believe that WELL Health is a good investment, there are several risks that could affect its growth. First, as described above, technicals are not supportive of the stock right now, meaning that it could see some drawdown in the coming months.

Second, the company has grown rapidly through acquisitions. Integrating all these separate entities could pose a significant challenge for the management. Historically, mergers and acquisitions have proven to be value destroyers in a large part. For example, it is just recently that Teladoc Health acquired Livongo Health for $18 billion. The combined company is now worth just $4.8 billion.

Third, there is significant competition in some of its industries. For example, the EMR industry is highly competitive, with top players like AthenaHealth, Allscripts, and Cerner having a substantial market share.

Summary

WELL Health is a fast-growing Canadian healthcare company that provides its services using an omni-channel model. I believe that it is a good long-term investment even though I believe that it is out of favor from a technical perspective.