This small-cap company is operating in a multi-billion dollar market, and after a record performance in 2020 is it a good investment?
Progyny (NASDAQ: PGNY) is a fertility benefits management company operating in the U.S. and has a vision "to ensure anyone can have a child when they want". Progyny provides fertility solutions that it claims can benefit employers, patients, and physicians, but after an impressive year, is it a good buy?
The Bull Case For Progyny Stock:
Progyny operates in a large and growing total addressable market set to increase at a double-digit compound annual growth rate in the coming years to reach $15 billion. Infertility is a major issue affecting one in eight couples and is more prevalent than other diseases such as diabetes and asthma. The average age that people are starting families has continued to increase in recent years, and biological fertility decreases with age creating a tailwind.
A key differentiator is that Progyny provides comprehensive support through Smart Cycle, its fertility offering, and Progyny Rx, its integrated pharmacy. It claims to have superior outcomes such as fewer miscarriages and faster times to get pregnant. Progyny partners with 800 fertility specialists across the U.S., with 46 out of the top 50 fertility practice groups by volume. This large number of clinics creates a network effect with facilities available to workers nationwide, and this accessibility is increasingly important with many employees working from home.
Progyny reported record Q4 revenue of $100.3 million, an increase of 54% year-over-year (YoY) and 50% growth on a full-year basis to $344 million. It also has a strong balance sheet with no debt and $109 million in cash as of December 2020. The majority of revenue is medical but Progyny RX which was introduced in 2018, is growing rapidly and made up roughly one-quarter of revenue in 2020. Progyny was also profitable with a net income of $48 million for fiscal 2020 compared to a net loss the year prior and expects revenue to accelerate in fiscal 2021.
Although the company is not founder-led, the management team is hugely experienced. CEO David Schlanger was previously the CEO at WebMD, where several others on the management team also worked. Schlanger also owns roughly 5% of the company, which is a positive sign for investors.
Progyny targets companies and has many high-profile clients, adding over 600,000 in 2020, and now covers 2.7 million clients. These clients include names such as Microsoft and Paypal and have had close to 100% retention rates since 2016. It boasts impressive net promoter scores for its fertility service and pharmacy solution Progyny RX, with scores of 78 and 81 respectively, demonstrating high membership satisfaction. Currently, approximately 50% of large employers offer fertility coverage as a benefit, and this is set to increase to two-thirds by 2022.
The Bear Case For Progyny Stock:
Progyny, due to the market in which it operates, has relatively low gross margins compared to other industries, such as software coming in at 20.3% in 2020. Although the company is profitable, these low margins do affect profitability, particularly over the long term.
Customer concentration is a risk as two companies accounted for 35% of total revenue as of December 2020. However, no other clients accounted for more than 10% of total revenue, and high customer concentration rates are not unusual with smaller companies. If Progyny were to lose either of these customers or if there was a change in the pricing terms, it would significantly impact revenue and the share price.
With the number of employers that Progyny has already attracted and over two-thirds of employers expected to have fertility offerings by the end of the year, Progyny may need to get other employers to switch to Progyny if it is to continue its growth rate. It may also have to rely on upselling and its pharmacy business to continue to increase revenue at the current rates, and management even hinted at expanding into new areas.
The company is by no means cheap, trading at roughly 88x forward price to earnings ratio and it is also small with a market cap of $4 billion. Due to this, the stock may be somewhat volatile and is not for the faint-hearted.
So, should I buy Progyny stock?:
This company is solving a growing problem and providing better solutions than its competitors. It has continued to grow revenue at an impressive rate despite the impact of COVID-19 and is liked by its clients. Despite the risks, it is well-positioned for future growth and could be a good addition and help diversify your portfolio.
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