It’s been a terrible year for tech stocks. Even heavyweight trillion-dollar juggernauts have lost more than half their value this year. The pain has been magnified for mid- and small-cap tech stocks. There simply isn’t enough liquidity in the market to preserve the valuation of these stocks.
This is why it isn’t surprising that niche medical software provider WELL Health Technologies (TSX:WELL) has lost so much value recently. The stock is down 41.7% year to date and 67% from its peak in February 2021.
I’ve been holding this stock since early 2020. Here’s why I continue to hold onto this stake and why I’ve accumulated even more shares in recent months.
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Growth
WELL Health is a typical tech-growth story. The company raised funds from a number of investors, including billionaire Li Ka Shing, to digitize North America’s healthcare market. Over the years, the team has managed to sign up more than 21,000 healthcare professionals and over 2,800 clinics.
Despite the recent plunge, the stock is up 2,610% since 2016 — a compound annual growth rate of 72% over six years!
WELL Health’s primary growth engine is mergers and acquisitions (M&A). Purchasing niche health tech startups allowed the company to roll out virtual healthcare clinics and an online pharmacy and expand services into the United States.
All this growth has continued in recent months. In the latest quarter, WELL Health reported 47% revenue growth and 40% adjusted earnings-per-share growth. Year-to-date revenue is up an astonishing 121%. The stock price, meanwhile, is heading in the opposite direction.
WELL Health’s valuation
The fact that the stock price has plunged while fundamentals have improved over the past year has made WELL Health’s valuation much more attractive. The stock currently trades at $2.98, implying a market capitalization of $684 million.
Meanwhile, management recently boosted the guidance for annual revenue in 2022 to exceed $565 million. Put simply, WELL Health stock trades at 1.2 times the current year’s revenue and below next year’s revenue per share.
The company also expects annual EBITDA (earnings before interest, taxes, depreciation, and amortization) to exceed $100 million this year. That means the stock is trading at 6.8 times EBITDA. WELL Health’s valuation is far more attractive than most tech and software companies. That’s why it deserves a spot on every growth investor’s watch list.
Bottom line
I’ve been holding WELL Health stock for over two years. The company’s valuation surged during the pandemic and has now retreated to pre-crisis levels. However, investors seem to have overlooked the fact that health tech is a secular growth story. The adoption of medical data management and telehealth services is detached from the economic cycle. That’s why WELL Health’s business continues to expand by double digits.
