1Life Healthcare: Good Start, Looks Promising – 1Life Healthcare, Inc. (Pending:ONEM)

1Life Healthcare (ONEM) has seen a very successful public offering in a market which is facing some turmoil. Despite pricing at the low end of the preliminary offering range, shares did rise an impressive 57% on their opening day of trading, marking a good start for this membership based healthcare provider.

This move kills most of the relative appeal, that of relatively modest sales multiple in relation to the reported sales growth, yet shares remain very interesting to watch, although I am not buying any shares at this point in time.

The Business

1Life aims to improve health and care, while reducing the total cost of care. The company aims to do this through the usage of both technology, while maintaining human-centred model. The company has a membership platform through which digital healthcare related issues can easily be arranged.

So far the company is serving nearly 400,000 members across 6,000 SMEs across the US. With general dissatisfaction and inefficiencies in the entire healthcare setting being high, there is plenty of need among consumers, businesses and healthcare providers to improve the outcome to create better healthcare outcomes, at fewer costs and higher effectiveness.

The company claims to have really high retention rates and Net Promoter Scores and generates recurring revenue streams based on the membership fees and actual procedures taking place. On a trailing basis, more than 2 million digital transactions have taken place as well as nearly 700,000 in-office visits.

The Offering & Valuation

1Life and its underwriters priced the IPO at the low end of the preliminary offering range of $14-16 per share. With 17.5 million shares offered by the company, the initial offering will bring in $245 million in gross proceeds.

The company has 122.4 million shares outstanding following the offering, which gives the company a $1.71 billion equity valuation at the offer price. Given the $170 million net cash position ahead of the offering, a substantial chunk of this valuation is made up in net cash, seen around $400 million if we take into account the IPO proceeds as well.

The actual underlying business generated nearly $177 million in sales in 2017 on which it lost nearly $32 million on an operating basis. Sales grew 20% in 2018 to more than $212 million, as operating losses were up both in absolute and relative terms to about $45 million.

Revenue growth accelerated in the first nine months of 2019 with sales up nearly 29% to $199 million, yet again losses rose from $25 million to $35 million as well. Encouraging is that third-quarter sales growth accelerated to 49% as a run rate close to $275 million is very impressive, as quarterly operating losses of $15 million are very large as well.

For the fourth quarter, sales are seen at $77.5 million, plus or minus a million, with losses seen around $18.6 million, plus or minus $1.5 million. This suggests that fourth-quarter growth has increased to 61% on an annual basis. Furthermore, operating losses are down slightly on an annual basis, although the loss in the final quarter of 2018 was on the high side.

Based on these numbers, we now have a +$300 million business which is growing at +50% per year, while the operating assets are valued at $1.4 billion, at the offer price. This is inherently interesting as the current loss rate can easily be sustained for a year of four.

With shares trading at $22 on their opening day of trading, the market value has increased to $2.7 billion, making that operating assets are valued at around $2.3 billion, equivalent to nearly 8 times revenues.

Risks & Thoughts

1Life is quite a risky, yet at the same time interesting business. The company is showing rapid growth, and in fact growth is accelerating. Furthermore, the company holds a substantial net cash position, which allows losses to be funded for quite a while.

The basic idea behind the sales traction is that the company is apparently fulfilling a need with many participants in the wider sector dissatisfied with current practices, as this thesis has probably been key why the company has actually attracted interest from prominent VCs in recent years. While this is to be applauded, other risks behind competition and losses is that of the regulated industry and relationship with key players in the business model.

While the operating asset valuation resulted in relatively modest sales multiples at the offer price, also taking into account the large net cash position, this valuation has increased substantially following the move higher on the opening day of trading. Hence, shares trade in neutral territory for me, yet I find this an interesting growth play to keep watching from here.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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