Earnings Update: Reports for LMND, TDOC, MP, GH
In this update, we’ll take a look at Q4 earnings for LMND, TDOC, MP, and GH, as well as what I’m watching for each one in 2023.
Earnings report #1: Lemonade (LMND)
I think this stock has been misrepresented, and for the most part people don’t seem to recognize the potential here. It’s not every day you see a company that’s attempting to disrupt the multi-trillion-dollar -insurance industry, but if that’s something you want to invest in, Lemonade is definitely worth looking into. They’re by no means perfect, but they have the best shot at being the first major disruptor in the insurance industry in decades.
Lemonade once again had fantastic growth in Q4, growing their sales by 116% YoY to $88.4 million. Their customer base is now sitting at about 1.8 million, which is 27% growth in the past year, and the average premium paid per customer increased by 30% to $340. So, not only did their customers grow, but the amount paid also grew by quite a bit! The CEO also mentioned he was pleasantly surprised at the growth in Q4 considering it’s usually a time where the insurance business slows down a bit. However, when you consider the potential market share that Lemonade can absorb, there’s still a very long way to go from here.
Getting to the heart of the matter, 2023 will be a really crucial year for Lemonade (as you’ll see, that’s going to be a theme in this article). This is mostly in relation to the company’s cash burning tendencies. Don’t get me wrong; when a company is first starting out and is doing something as big as Lemonade, there’s some necessary cash burn that has to take place. However, 2023 looks like the year we start to see that go in reverse. The CEO essentially said on their last earnings call that Q3 2023 would be the company’s “peak loss” quarter, meaning they’re prioritizing improving margins and cash management going forward.
We got a glimpse of this in Q4 in their YoY, as their revenue increased by 116% but their operating expenses only went up by 43%. Looking at QoQ data is even better; revenue grew by 19% and operating expenses actually went down by 4%. The way I see it, if we see that trend continue as well as cash flow turning consistently positive, the upside for LMND is massive.
Earnings report #2: Teladoc (TDOC)
Teladoc’s Q4 earnings report had two defining features (at least, to me); one of them was good, the other bad. We’ll start with the good!
Their BetterHelp acquisition from all the way back in 2015 continues to pay off. This is the behavioral health segment of their business, and in Q4 it accounted for over 43% of their total revenue. While their overall revenue grew 15% YoY, BetterHealth nearly doubled that with a growth rate of 29%.
Clearly, BetterHealth is the driver of their growth for now, but Primary360 (their primary care service) has been growing rapidly as well. This is a much smaller part of their business for now, but it’s expected to triple its revenue in 2023 and see a 5-10x increase in visits
As for the bad, Teladoc was hit with another goodwill impairment charge in Q4, this time for about $3.8 billion. It’s not good to see this as it reduces the value of their assets on their balance sheet, but the silver lining is that it’s a noncash expense on their income statement. So, it’s not like they had to pay someone $3.8 billion, but after $9.6 billion in goodwill impairment charges in Q1 and Q2, it’s wiped a lot of the value off their balance sheet.
Now, you may be wondering: what is goodwill? Technically it’s known as an “intangible asset” as opposed to a “tangible asset” like cash, property, or inventory. Because it’s intangible, it’s hard to value, and it’s usually based on an estimate figure that measures how much a company’s brand and influence is worth.
The reason Teladoc’s goodwill has been hit so hard this year is because they essentially overpaid for a company called Livongo Health back in 2020 and put a giant amount of expected value on their brand. As a result, the level of “goodwill” on their balance sheet went from $1.7 billion to $14.6 billion in one quarter after they made the acquisition. Unfortunately, it turned out that Livongo’s brand wasn’t worth nearly that much, and they spent 2022 dialing the value way down.
Looking ahead, Teladoc’s business is still very solid, especially BetterHealth and Primary360. These will be the areas to watch next year, and thankfully the goodwill impairment story is now behind us. The company is working towards profitability and was cash flow positive in 2022, which was also great to see. So, the things I’m watching this year are revenue growth for BetterHealth and Primary360 (as well as customer growth for Primary360), margin improvement, and less reliance on debt (they currently have $1.54b in long term debt vs $0.92b in cash/equivalents).
Earnings report #3: MP Materials (MP)
As I wrote about here, the main story for MP in Q3/Q4 was their transition into stage 2 of their business. This is no small undertaking, but we got some good news in Q4 about their developments.
First, as a reminder, MP is one of the largest producers of rare earth metals in the world, and one of the primary uses for these metals is magnets, which are used in all sorts of hi-tech and alternative energy machinery. So, it was also good to see them announce a partnership with Sumitomo, in which Sumitomo will be MP’s distributor of NdPr (the rare earth element that’s a key ingredient to magnets) oxide in Japan. This is a big deal, as Japan is the largest producer of neodymium (the “Nd” in NdPr) magnets outside of China.
Speaking of China, that’s where 100% of MP’s current sales go; in fact, they all go to the same company. This clearly isn’t ideal, but their customer base will be diversified significantly upon the implementation of Stage 2, which is a major benefit.
They also are on track to start delivering rare earth alloys to GM later this year, consistent with the partnership made back in 2021. They’re also on track to meet the 2025 goal of delivering magnets to GM as well, and we should see progress made towards their magnet producing business (which is part of stage 3) as 2023 unfolds.
Going back to MP’s developments, 2023 is going to be a year of transition. Whereas stage 1 was focused on mining rare earth ore, stage 2 will be focused on adding the separating process to turn that ore into oxide. MP began to test this process back in Q3 and will see production increase significantly in Q2 and they’ll begin making consistent revenue from it during the second half of 2023. If all goes well for MP, 2023 will be a huge year for them in terms of expanding their business, both in terms of technology as well as their customer base.
Earnings report #4: Guardant Health (GH)
If there’s a Disruptor (see all 21 here) that I’m most cautiously optimistic about for 2023, it’s Guardant, especially from a stock price standpoint. They took a huge hit back in December after the trial results for one of their products came back worse than a competitor; however, it’s still highly likely that it will receive FDA approval in early 2024.
There are two main trends for Guardant’s financials that I’m looking forward to in 2023. First is their precision oncology business, which is made up of several products that screen for a variety of cancers using blood samples. This segment now is almost their entire source of revenue, but it’s still growing faster than their overall revenue. For example, in Q4, their total revenue was $126.9m (up 17% YoY), but their precision oncology revenue was $113.8m (up 28% YoY).
Carrying this trend is underlying demand for their clinical tests; they sold over 36k units in Q4, which was up 41% YoY. Clearly, their products are taking market share, which is exactly what we want to see.
The second trend is that 2022 was expected to be their “peak cash burn” year. This is similar to Lemonade, where the business spent tons of money to create really useful products and build a solid base over the past several years, and now it’s time to focus on expanding margins.
Over the past 3 years, Guardant has grown their revenue by 110%, which is great; however, their operating expenses during that period grew by 271%. A lot of people would look at that and immediately write it off as an unsustainable business, but that money really didn’t go to waste as it built one of the most cutting edge set of cancer diagnostic products the market has to offer.
In 2023, they’ll still be growing their revenue at a good pace (precision oncology segment expected to grow more than 20% again), but they’ve also set the goal to actually reduce their operating expenses from 2022 levels. If they pull that off, I think the market will take notice and demand will increase notably. They also have set the goal to significantly reduce their cash burn and maintain a cash run rate of 3 years. At the end of Q4, they had just over $1b in cash/equivalents, and their goal for 2023 is to limit free cash flow to an outflow of $350m, which would be just under 3 years of leeway. Overall, Guardant has kept themselves in great financial conditions despite (necessarily) spending tons of money to build a great business, and I think 2023 could be a major turning point for them
That’s all for now! Next week, I’ll recap earnings for PLUG, DM, and DOCU, and you’ll probably be seeing a macro update from me early next week as well.