American Well: There Are No Visible Positive Catalysts In The Near Term

Summary

Readers may find my previous coverage via this link. My previous rating was a hold as I awaited American Well Corp. (NYSE:AMWL) to finalize the Converge implementation. This turned out to be the right recommendation, as the stock saw a big drop after the earnings, from $2.20 to $1.47. I am reiterating my rating that one should avoid AMWL for a worse reason – the weak 2Q23 performance and uncertain 2H23 outlook.

Financials / Valuation

The decline in 2Q23 revenue of $62.4 million (3.2%) was primarily attributable to decline in platform subscription revenue (5.4% decrease to $28 million) and visit fee revenue (5.4% decrease to $28.1 million). Adjusted EBITDA worsened and came in at -$45.3 million. Weak margins also impacted 2Q23 non-GAAP EPS, which came in at -$0.23.

Given the very bad near-term outlook, I think valuation is going to stay detached from fundamentals in the near term. Nonetheless, I framed up the potential bull case if AMWL is able to meet its FY25 revenue target. Suppose AMWL does meet that target (implying revenue growth of 20+% vs. peers’ median of 10% expected growth), valuation should start to close vs. peers that offer similar solutions to the health care industry (ACCD, DCGO, AGTI, ME, ADUS, MD, FLGT, and MODV). However, the lack of profit is likely to continue, causing AMWL to trade at a discount. The upside is certainly attractive; however, as I commented below, there is hardly any visible catalyst that could drive the stock upwards.

Comments

This is a bad quarter for AMWL that is going to see lingering impacts for the rest of 3Q23 and possibly the entire remainder of FY23. The key metric that really drove the negative stock price action was the decline in active providers sequentially, from 108k to 105k. I would imagine this would naturally kick-start a narrative like "growth has peaked" and the near-term growth outlook is bad". The decline was blamed on a lack of progress in expansion deals with existing clients, which management plans to address by reorganizing the sales team and adopting a more consultative sales strategy. The revamp in approach is probably a good one, but it introduces another form of uncertainty to the market. Overhauling the entire sales force takes a lot of effort, and in the meantime, there is likely going to be a lot of disruption to existing sales processes.

As for total visits, there was a 1% increase from the previous year, with 1.5 million visitors in 2Q23 compared to 1.35 million in 2Q22. That said, I'd like to point out that the sluggish growth is largely attributable to AMWL surpassing the tough comp in the previous year, which benefited from pandemic-related utilization. Due to a greater proportion of urgent care visits, which are considered commodities and therefore receive lower reimbursement, AMWL saw a 3.6% decline in revenue per visit. While the proportion of scheduled visits increased to 69% from 68% in the previous quarter, this still fell short of management's target range of 70%–75% due to an ongoing uptick in urgent care visits. Combining all of these together: a flip in the active provider growth trend + weak growth against tough competition + falling revenue per visit + weaker than expected schedule visits = very bad stock sentiment in the near term, which I expect will continue pressuring the stock.

In light of the postponement of certain expansion deals, management has lowered their revenue forecast for FY23 from $275 million to $285 million to a range of $257 million to $263 million. As AMWL management intends to revamp the sales approach, I don't see room for further upside in this forecast (in contrast, sales might actually get impacted given the disruption). Also, since AMWL is currently offering free upgrades to Converge, platform transitions will likely halt margin expansion in the near future. Accordingly, management adjusted their goals for FY25 to reflect these revisions. Management now expects to achieve positive adjusted EBITDA in FY25 at a revenue level of about $400 million, a 20% decrease from the $500 million previously assumed.

After a disappointing 2Q23 in which results fell short of expectations and guidance for FY23 was lowered, I am sticking with my hold rating. Longer upsell cycles led to fewer expansion deals than anticipated, which had a major impact on subscription revenue. While I think it might be good to change the go-to-market strategy (since the current one is not working out well), I doubt the market will give this strategy any credit until it proves itself. Therefore, I don't anticipate any significant catalysts in the near future to drive a re-rating.

Conclusion

AMWL recent performance and outlook reflect challenges ahead. The decline in 2Q23 revenue, accompanied by weakened financial metrics, signals a turbulent period for the company. The decline in active providers, subdued growth, falling revenue per visit, and disrupted sales processes have all contributed to negative sentiment and stock pressure. Management's efforts to reorganize the sales team and implement a consultative approach show promise, but uncertainty lingers. Despite a revised revenue forecast and adjusted goals for FY25, a lack of visible catalysts makes a meaningful near-term re-rating unlikely.