GoodRx: Beware Of Slowing Momentum (Ratings Downgrade) (GDRX) (2024)

Though the mood in the markets has turned far more sanguine over the past month as investors' interest rate expectations for next year declined, it's not exactly time to get complacent just yet. Stock-picking remains of utmost importance; and in particular we should cull fundamental underperfomers out of our portfolios.

GoodRx (NASDAQ:GDRX), in my view, falls into this position. The pharmacy discount app has been in an embattled state all year, with its business shrinking, trouble with both large customers as well as the FTC, and the exit of the company's founders. In spite of all this, the stock remains up more than 25% for the year:

Despite cheap price, there are too many risks here

I last wrote a neutral opinion on GoodRx in June. At the time, I maintained that the stock had a balanced bag of positive and negative drivers, and I harbored some hope that the company's new leadership (Scott Wagner, the company's interim CEO, is a former private equity executive) would be able to turn the ailing business around.

Since then, however, GoodRx has reported Q3 results - and I don't like what I see, with revenue continuing to contract and the company's monetization initiatives like subscriptions falling to the wayside. Now, I see primarily downside drivers for GoodRx. The following list are the key red flags to watch out for:

• GoodRx's pivot to direct relationships with retail may not pan out. In light of the company's fallout with its major grocer partner, GoodRx is shifting its focus to direct relationships with retail pharmacies, not wanting to have the same reliance on its PBM partners.
• Subscription plan shrinkage. Memberships to GoodRx Gold, the company's premium discount program, are declining - a further indication that fewer and fewer customers are turning to GoodRx.
• Reliance on transactional revenue. With diminishing revenue from both subscriptions as well as pharma manufacturer solutions, GoodRx's base of steadier, recurring/contract-based revenue is shrinking, leaving the company exposed to consumer transactions - the makings of what could be a very lumpy business.
• Recent FTC scuffle may damage the brand. GoodRx recently paid a $1.5 million settlement to the FTC, which alleged that the company shared consumer data with Facebook (META) and Google (GOOG) (GOOGL) for advertising purposes.

The only potential draw to GoodRx is its cheap price. At current share prices just under $6, the company trades at a market cap of $2.40 billion; and after netting off the $794.9 million of cash and $655.9 million of debt on the company's most recent balance sheet, GoodRx's resulting enterprise value is $2.26 billion.

Meanwhile, for next fiscal year FY24, Wall Street analysts are expecting GoodRx to grow its top line 5% y/y to $784.4 million; and if we apply its current-quarter adjusted EBITDA of 28% to that revenue profile (the company has also guided to a "high 20s" adjusted EBITDA margin for the current full year FY23); adjusted EBITDA would be roughly $219.6 million. This puts GoodRx's valuation at 10.3x EV/FY24 revenue.

The only "upside risk" I see to GoodRx is a private equity buyout. With a PE-minded executive at its helm, I could see GoodRx embarking on a cost-cutting spree to make the business look prettier for a sale.

However - with trends falling so sharply and top-line momentum so weak, I doubt this scenario is likely to play out, and not something I'd bank on to make the investment thesis for this stock work. All in all, I'm downgrading GoodRx to bearish due to its recent trends - steer clear here and invest elsewhere.

Q3 download

Let's now go through GoodRx's latest quarterly results in greater detail. The Q3 earnings summary is shown below:

GoodRx's revenue shrank -4% y/y to $180.0 million, which heavily missed Wall Street's expectations of $188.3 million (flat y/y). The company chalked up the miss to a $10 million payment to a client in its pharma manufacturing solutions business, owing to a contract termination.

Needless to say, trends are not looking good for the company here. The right side of the chart below shows the sharp sequential declines in the company's pharma manufacturing solutions business, which is decimated after the exit of a VitaCare customer.

Transactional revenue, the largest source of GoodRx's income, grew 3% y/y. The company has been building more retail relationships across its network. Per interim CEO Scott Wagner's remarks on the Q3 earnings call:

GoodRx was originally built in partnership with PBMs, who enabled broad distribution across 70,000 pharmacies, and GoodRx brought to band with double-digit millions of annual consumers seeking savings on prescription medication. We're now complementing these PBM relationships with several significant retailer partnerships that can help retailers with their traffic and margin priorities while continuing to deliver great affordability to consumers.

For example, in September, we launched a direct program with Walgreens on nearly 200 medications that drove significant incremental claim volume for Walgreens and helped a huge number of consumers save money on their medication. We've also created drug-specific pricing programs at several other large retail pharmacies in the quarter. As a marketplace, we're not just creating pricing transparency and value for consumers, but also marketing and merchandising opportunities for our retail partners. We plan to continue strengthening and expanding our relationships, retailer by retailer, over the coming quarters. We believe the continued progress here will help us ensure network stability, provide more value to retailers and PBM partners alike, and allow us to drive consumer demand and proactively help retailers with price and margin optimization."

Still, we worry that A) the company is noting lower fees per transaction, and B) it has been unable to grow its active consumer base. As shown in the chart below, GoodRx has been "stuck" at 6.1 million active consumers for the entirety of this year:

Making matters worse, the company continues to shed subscription plan subscribers, and subscription revenue declined - 12% y/y to just $23.2 million.

The only silver lining for GoodRx is continued strong adjusted EBITDA, which grew 3% y/y to $53.5 million in Q3 despite the revenue decline. Margins also improved 30bps y/y to 28.1%:

Key takeaways

To me, GoodRx has only two things going for it: a cheap valuation and strong adjusted EBITDA which could appeal to a potential buyer. Yet, with flat to declining top line growth, even this limited profit generation capacity could dwindle.

I'd prefer to remain on the sidelines here and invest elsewhere.

With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.