Does GoHealth’s Unhealthy Stock Performance Make it a Buy?

Back in July 2020, GoHealth (NASDAQ: GOCO) was being touted as the next major player in the online health insurance space. Eleven months later, some investors are wondering if the company will even survive.

Since making their Nasdaq debut at $25, GoHealth shares have gone in only one direction—down. Now trading in penny stock territory at less than $5, a company that once seemed to have all the answers now seems to be at a loss for words.

All hope is not lost though. Despite the poor stock performance, there are some positive underlying trends in the business that could support a turnaround in 2022. If management can navigate the near-term challenges related to staffing and costs, GoHealth’s current price could turn out to be a healthy bargain.

What Caused GoHealth Stock to Drop?

After the close on August 11^th, GoHealth reported second-quarter results that beat modestly on the top and bottom lines. Revenue increased 55% to $196.9 million and the $0.03 per share net loss was a couple of pennies better than analysts expected.

So, the Q2 diagnosis was benign, but management’s outlook for full-year profits was a sore point with the market. Due to tight labor market conditions and the need for enhanced training, GoHealth’s staffing costs are expected to be elevated for the remainder of the year. Given the intense competition in the industry, GoHealth can’t simply pass on the increased labor costs to customers through price increases.

This will further impact profitability in 2021 and caused a downward revision of the full-year EBITDA outlook to $300 million to $330 million. At the midpoint, this would represent a respectable 16.5% year-over-year growth, but many GoHealth shareholders decided that was the last straw. The stock dove 43% on August 12^th in nearly 20 times the average trading volume.

What are GoHealth’s Long-Term Growth Prospects?

Over the next couple of quarters, the e-broker group may tread water. That’s because there aren’t any major events or catalysts on the horizon to support a significant move one way or the other. Unfavorable supply-demand dynamics in the industry won’t be of much help either with the space getting crowded and health insurance shopping in a seasonally quiet period.

But with the 2022 Medicare enrollment period set for October 15^th to December 7^th, GoHealth may see better times ahead—and it is therefore getting ahead of the game. It expanded its agent count beyond the company’s 50% target in Q2 in anticipation of a surge in demand for online Medicare enrollments. Despite the challenges in finding new agents, GoHealth should have a suitable force in place by the time Medicare customers storm its platform.

Still, GoHealth stock will probably float with the tide in the intermediate-term. Over time, however, the pockets of strength in the business should win out. Approved submissions for Medicare Advantage plans jumped 52% last quarter and the all-important lifetime value (LTV) metric increased 5% to $953. This shows that the company is getting more out of each customer relationship and that add-on offerings are proving effective. Its new digital Encompass telecare platform will play an important role in attracting additional insurance carriers through improved patient coverage, health outcomes, and medical care ecosystem access.  

Is GoHealth Stock Oversold?

GoHealth shares were up 15% as of midday trading on Monday. Is it simply a ‘dead cat bounce’ or the start of the comeback trail?

From a technical analysis perspective, GoHealth clearly entered oversold territory. As the selloff steepened on Friday, the relative strength indicator (RSI) dipped to a paltry 11.6. Moreover, the stock fell well outside the lower Bollinger band suggesting the volatile move was all too unusual.

Since then, bottom feeders have swooped in, and the technical picture has somewhat brightened. The RSI reading is back around 20 and is close to crossing over its five-day moving average. It is also encouraging that trading volume remains well above normal during the upswing.

GoHealth is likely to stay volatile in the coming days as the bulls and bears wrestle over its investment merits. But over the long haul, the stock is more likely to trend back towards double digits rather than slip further into penny stock land.

There’s a good chance management can overcome the near-term hiring headwinds by ramping recruitment efforts and sweetening the compensation pot. Price competition challenges may take more time to work through but can be conquered by additional product offerings that allow for more premium pricing.

At 4x forward earnings, GoHealth is worth playing the waiting game. It’s not unusual for young tech companies to face cost pressures and similar growing pains. Eventually, the underlying growth trends in the business should shine through.

Buying health insurance online is where the industry is headed. GoHealth’s differentiated marketplace and strong customer relationships have it in a good position to emerge as one of the winners.