Is SelectQuote a Double-Bagger Stock? Analysts Predict Huge Gains

Key Points

• SelectQuote is a small insurance stock with 113% upside potential according to Wall Street price targets.
• Its business model and healthcare segment have some exciting advantages over traditional insurance companies.
• Its valuation appears reasonable compared to other insurance firms.

It might be surprising for some to hear that 2024 has been a great year for stocks in the insurance industry. In fact, every single large-cap insurance stock in the United States and Canada trading region has a positive return this year. Additionally, the iShares U.S. Insurance ETF NYSEARCA: IAK has provided a total return of nearly 29%.  Some stocks, like Progressive NYSE: PGR, are up more than 50%.

SelectQuote NYSE: SLQT is no exception to the success of this industry. Shares are up 54% this year. However, one metric that does make it stand out is the average Wall Street price target placed on the company. It sits at $4.50. This means the stock could rise 113% from the $2.11 level as of the Oct. 8 close. This average price target matches up with the figure set by analysts at Craig-Hallum, who initiated coverage of the stock on Sept. 30.

SelectQuote’s Business Model Has Advantages Over Traditional Insurance Companies

SelectQuote is a direct-to-consumer platform for shopping for insurance. It covers life, home, auto, and senior health insurance. It is not an insurance provider but simply finds insurance products for consumers. SelectQuote then gets a commission from the insurance provider when the consumer buys a policy.

The company claims that its competitive advantages are its technology and skilled agents. Its technology takes in customer data and analyzes it to connect a consumer to an agent that is best for them. Combined with the company’s transparent pricing terms, a better customer experience is offered. This improves customer retention and leads to the company collecting more commissions over the life of an insurance policy.

The model of SelectQuote has some advantages over a traditional insurance company. First, because the company’s salespeople do not work for a particular insurance company, they should be able to actually offer customers a better price. They can compare prices across the industry, and are not beholden to one company, making selling insurance much easier.

Additionally, the ability of agents to compare policies reduces the feeling from a customer that they are being “sold to” and pressured to buy a particular product. It’s easy to see how this would lead to a better and longer lasting customer relationship. Lastly, the company can make money off these policies without taking on any of the insurance risks themselves.

SelectQuote’s Healthcare Services Are Driving Growth

Another important part of the company’s business is its healthcare services platform, which includes SelectRx. SelectRx is a pharmacy that ships prescriptions directly to patients. It also helps patients manage their prescriptions and ensure they take them on time. Additionally, its SelectPatient management platform helps patients manage their chronic conditions.

Since 2022, the company has shown an incredible ability to grow this part of the business, particularly through the pharmacy. Pharmacy revenue has grown by 680% in just two years, compared to growth of 22% in insurance commissions. This is likely due to the company's large base of senior health insurance customers. It makes cross-selling pharmacy products highly effective.

The company has been getting closer to profitability since starting the healthcare services part of the business in 2021. This part of the business has added significant revenue to the company, but has also come with significant costs. Still, gross margins in the segment are growing. This has helped the company reduce its loss per share in fiscal 2024 to $0.20 from a loss of $1.81 in 2022.

Valuation and Final Thoughts

Despite its large rise this year, the company does not seem overvalued compared to other insurance companies. Its 11.5x last 12-month enterprise value to EBITDA ratio sits slightly below the 12.6x average of all U.S. insurance companies with market capitalizations of at least $300 million.

The company expects revenue growth to slow significantly from the plus 30% range over the past years to around 10% next year. However, it does see loss per share improving by 30%. A big concern is that the company sees adjusted EBITDA falling by 10%.

It says this is due to a change in its commissions structure from one of the largest insurance companies it works with. This created a capital constraint, not the firm to hire as many agents for next year. However, it believes this is temporary. For me, SelectQuote looks like a nice business model that is going closer to profitability and has a reasonable valuation.