American Well: Better Entry Prices Might Appear (NYSE:AMWL)

Investment Thesis

American Well Corporation (NYSE:AMWL) is a telemedicine company that is well-positioned to benefit from the growing demand for virtual healthcare services. The company’s technology platform and partnerships with major healthcare providers give it a competitive advantage in the market. Although the company is currently not profitable and faces risks such as intense competition and regulatory challenges, the long-term growth potential of the telemedicine market and American Well’s strong market position make it an attractive investment opportunity for investors with a high-risk tolerance. I think the company will continue growing, but there are some short-term headwinds that make me believe there might be better entry points instead of now. For that reason, I think a fair rating would be a hold.

Market Tailwinds

American Well Corporation operates in the rapidly growing telehealth market. Telehealth refers to the delivery of health care services and information through telecommunication technologies, such as videoconferencing and remote monitoring. The global telehealth market is expected to experience significant growth in the coming years due to several factors, including an increasing demand for remote healthcare services, advancements in technology, and a shortage of healthcare providers in certain regions.

According to a recent report by McKinsey, telehealth utilization in the US increased from 11% of consumers in 2019 to 46% of consumers in 2020. This trend is expected to continue even after the pandemic subsides, as consumers have become accustomed to the convenience and accessibility of telehealth services.

Another tailwind for American Well Corporation is the increasing availability of high-speed internet and mobile devices. These technological advancements have made it easier for patients to access telehealth services from the comfort of their own homes. Additionally, telehealth services can help to bridge the gap in healthcare access in underserved areas, where there may be a shortage of healthcare providers.

The US telehealth market is expected to continue its growth trajectory, with some estimates projecting a compound annual growth rate (CAGR) of 22.9% from 2023 to 2030. The increasing prevalence of chronic diseases, the aging population, and rising healthcare costs are all factors driving this growth. Furthermore, the telehealth market is becoming increasingly competitive, with new entrants and partnerships emerging. As a leader in the telehealth space, American Well Corporation is well-positioned to capitalize on these market tailwinds and continue to grow its market share.

Business Outlook

American Well Corporation had a successful Q4, concluding a strategic year for the company. Gross margin increased to 42.4% compared to 39.9% in the previous quarter, while the net loss decreased to ($61.6) million from ($70.6) million. Adjusted EBITDA was ($43.4) million, up from ($41.9) million in Q3. Active providers grew by 11%, totaling approximately 107,000, and total visits increased by 10% to 1.7 million, with Converge representing 28% of total visits.

According to Dr. Ido Schoenberg, Chairman and CEO of Amwell, the completion of the core elements of Converge, the company’s software platform, was a significant achievement. Client migrations remained on track, and relationships with strategic clients were strengthened. The solution has received positive market feedback, extending the company’s value proposition to payers and providers of all sizes.

Schoenberg added that it was an incredible year for the company, with successful execution and a focus on becoming the enabling partner for hybrid care. The company has integrated behavioral health and automated care programs into the platform, working closely with clients and partners to leverage Converge’s value across their organizations.

The Financials

American Well Corporation’s consolidated balance sheet shows that the company’s current assets decreased from $827.3 million in 2021 to $626.6 million in 2022. This decline is mainly due to a decrease in cash and cash equivalents, accounts receivable, and prepaid expenses. However, it is worth noting that the decrease in accounts receivable is partly due to the net allowances of $1.8 million in 2022, compared to $1.8 million in 2021. The company’s inventory has increased from $7.5 million to $8.7 million in 2022, which could indicate an increase in the company’s production capacity.

American Well Corporation’s property and equipment decreased from $2.2 million to $1.0 million in 2022, indicating that the company has sold or retired some of its assets. The company’s goodwill has also decreased from $442.8 million to $435.3 million in 2022, which could indicate a reduction in the company’s future earning potential from its intangible assets. The company’s intangible assets have decreased from $152.4 million to $135.0 million in 2022, indicating that the company has amortized some of its intangible assets or that some of its intangible assets have become impaired.

The company’s current liabilities have decreased from $141.6 million in 2021 to $114.1 million in 2022, mainly due to a decrease in deferred revenue from related parties. However, the decrease in deferred revenue could also indicate a reduction in future revenue for the company.

The company’s stockholders’ equity has decreased from $1.3 billion in 2021 to $1.1 billion in 2022, mainly due to an increase in accumulated other comprehensive losses and accumulated deficits. This indicates that the company has incurred losses in the current year, which could negatively affect investor confidence.

Overall, American Well Corporation’s balance sheet shows mixed results. While the company has decreased its current liabilities and increased its inventory, it has also decreased its current assets and goodwill. Furthermore, the company has incurred losses in the current year, which could negatively affect investor confidence in the company’s ability to generate future profits.

Risks

There are several risks facing American Well Corporation, some of which are related to the company’s financial performance and others that are more market-based.

One major risk for American Well is the intense competition in the telehealth industry. The company faces competition from established players such as Teladoc Health and Doctor On Demand, as well as new entrants seeking to capture market share. This competition could result in pricing pressures and a reduction in market share, which could negatively impact the company’s financial results.

Another potential risk for American Well is its dependence on a relatively small number of customers for a significant portion of its revenue. The loss of one or more of these customers could have a material adverse effect on the company’s financial performance.

Additionally, the company’s balance sheet shows a significant amount of goodwill and intangible assets, which are subject to potential impairment charges. If the company’s assumptions regarding the value of these assets are incorrect, it could lead to a material impairment charge, which would negatively impact the company’s financial results.

Dependence on partners, American Well collaborates with various partners to expand its reach and offerings. The success of these partnerships is crucial for the company’s growth prospects. Any issues or disagreements with partners could lead to disruptions or delays in product development, sales, and revenue generation.

Regulatory and legal risks, the regulatory landscape for telehealth is constantly evolving, and American Well may face risks related to compliance with changing regulations. Additionally, the company may face legal challenges related to data privacy, security breaches, and malpractice claims.

Overall, while there are certain risks associated with investing in American Well Corporation, the company operates in a rapidly growing market with significant tailwinds, which could provide opportunities for long-term investors. However, investors should carefully consider these risks before making any investment decisions.

Valuation and Conclusion

The P/S ratio for the company is 2.33 while the P/E ratio is 17.7. These ratios indicate that the company is currently trading around the same or slightly below the industry averages.

In comparison to its peers in the telehealth industry, American Well Corporation’s P/S ratio is lower than Teladoc Health, Inc.’s ratio of 4.09 and lower than 1Life Healthcare Inc.’s ratio of 20.85. However, the comparison is not entirely fair as each company has different business models, market shares, and growth prospects.

It is essential to note that the telehealth industry is still relatively new, and the market’s growth prospects are significant due to the increasing demand for virtual healthcare services. The COVID-19 pandemic has accelerated the adoption of telehealth services, and the trend is expected to continue in the coming years. According to a report by Grand View Research, the global telehealth market size is expected to reach USD 559.52 billion by 2028, growing at a CAGR of 25.2% from 2021 to 2028.

In conclusion, while American Well Corporation’s valuation metrics may appear high, the telehealth industry’s growth prospects are significant, which presents an opportunity for the company to expand its market share. However, investors should also consider the risks mentioned earlier, such as intense competition, regulatory changes, and high operating costs. The headwinds make it difficult to make a strong buy case and instead holding onto shares might be the best move going forward. There is growth to be had, but better buying prices might appear.