DocGo: Strong Showing Overall With Potential Fast Topline Growth (NASDAQ:DCGO)

Investment Thesis

Our earlier “strong buy” advice of the stock resulted in virtually 50% returns at its highs in about three months. We revisited the thesis by overlaying DocGo’s (NASDAQ:DCGO) newest earnings report, concluding our earlier projection was on observe, and made slight updates on the evaluation; finally recommending it as a purchase.

Review of the Latest Earnings And Our Previous Thesis

In the newest earnings report, DocGo reported fourth-quarter EPS of $0.050, higher than the analyst estimate of $0.049. Revenue for the quarter got here in at $108.8M versus the consensus estimate of $103.82M. Here we summarize our earlier theses analyzing DocGo’s enterprise strengths and weaknesses with a forward-looking evaluation. We will assessment in the event that they nonetheless maintain for the corporate.

Previously, we recognized that DocGo’s technological benefit was in its value and expense management. Although its value of income and working bills have elevated in absolute worth phrases, they’ve declined to their lowest ranges as percentages to income in a 12 months. In a high-inflation surroundings, this isn’t frequent amongst most firms, particularly within the healthcare business, the place labor and tools prices are inclined to have increased stickiness.

Even with the decline of the general value and expense in comparison with income, the corporate continued to spend on its analysis and growth, with its ratio as a proportion of working bills reaching the very best because it went public by way of IPO.

This benefit ought to proceed to be a powerful level for the corporate going ahead. More various information and rising networks will proceed optimizing its algorithms’ prediction of the operational value and useful resource allocation (see our earlier article for extra particulars).

On the expansion entrance, its full-year income and gross income are each increased YoY, though it misplaced $49 million in non-recurring Covid testing income in This autumn in comparison with This autumn 2021. This can be what we beforehand predicted virtually 6 months in the past: though Covid testing contributed considerably to its income in 2021, DocGo has agency footing from its municipal contracts to have a clean transition when dropping that a part of its income. In specific, its full-year income of 2022 was 38% increased YoY, and its gross revenue was 35% in 2022 in comparison with 34% in 2021.

DocGo additionally made important investments in mergers and acquisitions. Its full-year funding within the acquisition of companies is $32.9 million, which was 20% of money on the finish of the interval. It nonetheless has ample liquidity as its money at hand on the finish of the interval remains to be at about $164 million. Given DocGo’s bold plan to penetrate its potential market and acquisition being certainly one of its only methods to achieve footing, the administration has made acceptable calculations when it comes to spending and liquidity. And its present debt-to-equity ratio is 7%, and its debt-to-EBITDA ratio is 62% on a TTM foundation. The firm’s benefit of a low debt burden in the next rate of interest surroundings nonetheless holds, as we beforehand alluded to.

Moreover, its money conversion cycle goes sturdy. With its account receivable rising sooner than its account payable, the distinction between them has reached its highest stage in two years.

We have turn into extra optimistic in regards to the firm in comparison with our earlier evaluation. The firm has confirmed it is ready to handle substantial growth whereas holding liquidity and debt in verify with out dramatically rising prices and bills. This is essential for the corporate’s upside and can be examined over and once more by the market. But for now, we predict the administration has executed an excellent job.

Forward-Looking

Most of its margins have come down in comparison with Q1 of 2022. It is primarily as a consequence of its income being decrease for a similar interval. They are nonetheless on a long-term upward development in a YoY comparability.

DocGo did expertise a slower gross sales tempo in This autumn, with its days of gross sales excellent at about 76 days in comparison with the sooner tempo of 48 days in This autumn 2021. However, that is nonetheless inside its norm because the tempo in 2019 was additionally 76 days. We see it as a normalization as society recovers from the extreme interval introduced on by Covid. Going ahead, will its quick tempo development proceed?

We see numerous potential unfolding for DocGo. The firm’s collaboration with Dollar General (DG) is correct on schedule in its roll-out. This providing is currently available in a part of Tennessee’s Dollar General places, with its telehealth extensively accessible in that state. And it reported in its earnings launch that it has a $180 million backlog unfold over three years to be absolutely rolled out by 2H of the 12 months.

For its medium-term development, DocGo has 34 energetic RFP submissions pending awards totaling over $1 billion in combination contract worth. Pending means, they could or could not get the contract. So if we assume they get half of it and the contracts unfold out by 3 years, because it signifies the present backlog is about 3 years, then that can be about $166 million a 12 months. This is about 37% added income every year. Investors could make their very own assumptions on this calculation, however the potential is there to the upside.

Weaknesses & Risks

For DocGo’s near-term dangers, we proceed taking note of how its growth tempo matches its potential and sustainability. The firm said within the earnings name that it not too long ago gained traction in Connecticut, Chicago, and Southern California. How it’ll keep traction with out overspending would be the key. Moreover, we observed there may be an merchandise on its working money stream as “Bad Debt Expenses”, which was as a consequence of uncollectible account receivables of about $4 million. It is minimal in comparison with its This autumn whole account receivable of $103 million. But is that this because of the quick growth tempo that some accounts are arrange in a rush, or due to the dangers in attending to know the brand new service areas and the purchasers? We will keep watch over it.

Also, we’re not sure why the administration did not give many updates on its municipal contracts’ present state and outlook in the course of the earnings name. We perceive a few of them are nonetheless within the bidding, however with present contracts, there also needs to be new developments. The firm’s income is focused on native municipal contracts, resembling New York City’s refugee program. These contracts give it a cushion and development buffer with multi-year money stream visibility. We see continued progress on this entrance from its 10K, resembling buying Government Medical Services, LLC (“GMS”), which helps the corporate enhance entry to municipal contracts. But general, there’s a danger that native governments’ spending isn’t being maintained at a particular stage because of the unsure financial outlook. However, we do not see any indication of such but. Even if the economic system slips into a gentle recession, it should not change most municipalities’ spending trajectory in well being care and social providers, as they’re particularly wanted throughout robust occasions.

Financial Overview

Valuation

We beforehand really helpful shopping for at $6.64, and inside 3 months, DCGO reached $10.23, gaining by over 50%, and it’s nonetheless up by about 27% at the moment. Using our proprietary fashions, we up to date and made one other evaluation of DocGo’s truthful worth with a ten-year projection ahead. We use the price of equity of 6.82% and WACC of 6.67%. In our bullish case, DocGo is ready to develop at a quick tempo of 10%-20% for the following seven years in its money stream and earnings; it was priced at $14.76. In our bearish case, the corporate maintains regular development, however the tempo not solely fluctuates but in addition has dropped to about half of what’s within the bullish case; it was priced at $10.65. In our base case, it has a lesser development price for the following three years in comparison with the bullish case to account for any financial recession, however goes again as much as greater than 20% development afterward earlier than moderating it down; it was priced at $12.98. The swing issue between bullish and bearish situations is whether or not the corporate can maintain a wholesome development tempo with out stretching too skinny, and how briskly its acceptance could possibly be in a broader medical care apply. In all our instances, the truthful worth was revised upward by 2-4% in comparison with our earlier estimates. The market worth at the moment is under our backside evaluation. Given the worst-case situation, we consider the stock has a few 25% upside from right here.

Conclusion

Reviewing the newest growth of DocGo, we concluded that our earlier thesis was heading in the right direction. The firm’s development is wholesome and strong, with its benefit in value effectivity and low debt burden intact. Its growth tempo is sufficiently maintained with out jeopardizing long-term development. The present market worth is decrease than our backside estimate, and we advocate a purchase with once more a double-digit return expectation.