Progyny Inc. Offers Limited Upside At Today’s Valuation – Seeking Alpha

Investment Thesis

In our previous article on Progyny Inc. (PGNY), we discussed the great attributes of this business which offers a unique value proposition and has exhibited tremendous growth over the last several years. What's more impressive is that despite the aggressive top-line growth, the business is profitable and will likely grow its margins in the near future. However, we also discussed the elevated valuation at which the stock was trading near its IPO and cautioned investors to monitor from the sidelines. To date, the market has certainly not ascribed to our view on valuation with the stock price having increased ~120% over 3 months with no real change in the company's fundamental situation. The stock is currently trading at ~8x NTM revenue and ~80x NTM EBITDA which we believe to be extremely rich for a company which has essentially been successful on the basis of a first mover advantage without any proprietary product/service/technology. Although we believe the company can establish a leadership position in it's market, the risk of new entrants and/or established competitors (large insurance company's) copying their model is high. Also, the fertility benefits market is quite niche and at some point runs the risk of being saturated. We recommend that investors wait for a better entry point to establish a long position and although we are generally not proponents of shorting equities, this particular stock does provide an opportunity for short sellers to take advantage of today's rich valuation if they can live with the risk of potential downside in the near future.

Price action since IPO (Source: Yahoo Finance; Author's comments)

PGNY is a benefits management company that provides its clients (US employers) the ability to provide coverage for employees for fertility treatments (e.g. IVF). The company currently offers two types of solutions to its clients: 1) Fertility Benefits and 2) Progyny Rx with the second solution being an add-on to the core fertility benefits. Fertility benefits are focused on providing coverage for fertility treatments and are a solution that is highly personalized including a dedicated Patient Care Advocate [PCA] with fertility expertise that provides end-to-end concierge support, including logistical and emotional support, as well as clinical guidance. Compared to traditional insurance coverage for fertility benefits that have maximum dollar limits along with other restrictions, PGNY's fertility benefits are essentially structured as managed services that design the most effective plan for each member vs. a "one size fits all" plan. The image below shows some of the services covered by these plans

Analyst Coverage

The company has received very rosy analyst coverage since its IPO which is expected for most newly traded public companies as the research coverage is usually part of the deals that banks and others sign with the company as part of their underwriting package. Even if investors are to put their faith in the recommendations put forth by covering analysts, we would point them to the fact that the current target prices set by these analysts are actually lower than today's stock price (see chart below). Furthermore, we believe there is a fair bit of risk inherent in the methodology used by some analysts to set their target price. For example, JP Morgan has set their $30 price target by applying a 32x multiple to the company's forecasted EBITDA for 2021 (i.e. 2 years out). JP Morgan forecasts 2021 EBITDA at $79M whereas 2019 EBITDA for the company at the time of their report was forecasted at $18M. This mean that the price target assumes the company growing EBITDA by ~340% in 2 years on top of tripling their revenue during this period. While the company has exhibited good performance over the past few years, investors must note that its much more difficult to grow at the same rate from a higher base. Additionally, as discussed in our previous article, the fertility management space is quite niche and the forecast assumptions used by JP Morgan likely assume PGNY capturing a fair chunk of the overall market (we will discuss the risks around this in the next section) along with no customer attrition and basically perfect execution. JP Morgan and other analysts are also using a multiple which compares to other healthcare providers like Teladoc. We believe this comparison if flawed as Teladoc is much more technology focused and is chasing a market that is much larger than PGNY's space. We encourage Readers to view our detailed analysis on Teladoc and compare the market size and leadership positions of the two companies in their respective markets.

Analyst views on PGNY (Source: CapitalIQ)

First Public Financial Release

The first public financial release following an IPO usually has an over weighted impact on stock price as investors are looking for validation on whether the company can sustain its growth profile. Of course companies know this and this plays into their IPO timing plans ahead of time. On a headline basis, PGNY had an impressive Q3-2019 release which also included decent guidance for Q4-2019. YoY, quarterly revenue grew ~2.5x with a substantial increase to adjusted EBITDA. We can see how these figures at a high level would boost investor perceptions of the company and lead to early gains in stock price. We caution investors however that the company is yet to release their full year guidance for 2020 and this will be a much more telling stat. Analyst consensus calls for a 70% - 80% increase to YoY revenue for 2020 and 100% increase to EBITDA and even a hint of lower guidance can have a magnifying impact on stock price.

PGNY Q3-2019 financial results (Source: PGNY news release)

Near Term Factors

Expiration of Management Lock-up Period

The lock-up period after which management can sell their shares in the company/exercise options ends on April 22, 2020. We view this as a risk which could lead to a decrease in the share price for the following reasons:

Generally when companies go public, part of the rationale is for management and existing shareholders to monetize part of their holdings. This is especially a risk when it comes to PGNY as the use of proceeds section in the company's S-1 filing didn't provide any specific purposes:

The principal purposes of this offering are to create a public market for our common stock, facilitate our future access to the capital markets and increase our capitalization and financial flexibility. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering.

Financial Guidance for 2020

As discussed above, any hit of a miss vs. analyst forecast when the company provides its 2020 guidance can cause a severe decline in stock price which currently incorporates aggressive top line growth.

Longer Term Factors

Customer Concentration

Top 5 clients account for >50% of revenue and a significant number of clients are in the technology industry. The loss of one or more of these clients or changes within the technology industry could negatively impact the business. Also note that given the company has only been in operations for a short time, it is unclear whether the contracts for any of the clients have been renewed after the initial term expired. The risk here is that upon renewal, customers don't use the service any more or look for lower pricing which is quite common in enterprise contracts. We also discussed in our previous article that the market for this service could be smaller than what the company claims and limited mostly to companies with >2,500 employees. Currently, 98% of lives covered by PGNY pertain to clients with >2,500 employees with ~50% of covered lives within the top 2 clients.

Competition

Although there are no clear competitors to PGNY that we have noted to date, given the success of the company it is not hard to see how others may jump into this market. As noted previously, this service is not proprietary and another player could build up a network of doctors to copy PGNY's model. Additionally, all the large insurance companies do provide fertility benefits today however are missing the concierge service provided by PGNY. Looking at the success of the company, large insurance company may be tempted to copy this model.

The company is currently valued in a zone that is well beyond its direct competitors (insurance companies). Even if view the company from the lens of a disruptive business model, we find it challenging to see how today's trading multiples are justified. We have included Teladoc as a comp below however as noted previously, we believe that PGNY does not warrant a similar premium as Teladoc.

Source: CapitalIQ

PGNY has a robust business model and will likely continue to exhibit an impressive growth trajectory however current valuations are extremely rich and we caution investors thinking of going long. We recommend investors at least wait till the lock-up expiration period to establish a long position. PGNY could also be of interest to short sellers at today's valuation however we are generally not advocates of shorting equities.

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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Progyny Inc. Offers Limited Upside At Today's Valuation - Seeking Alpha

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