CloudMD is trading at a big discount, says Echelon

Rob Goff of Echelon Capital Markets sees a big valuation disconnect when it comes to the market’s take on CloudMD Software and Solutions (CloudMD Software & Services Stock Quote, Chart, News, Analysts, Financials TSXV:DOC). In a report on Friday, Goff maintained a “Buy” rating and target price of $4/share for a projected return of 440.5 per cent.

Based in British Columbia, CloudMD provides SaaS-based health technology solutions to medical clinics in North America, including its CloudMD telemedicine platform that connects patients to physicians through videoconferencing technology, operates a network of interconnected medical clinics, as well as operating Re:Function, an integrated network of eight rehabilitation clinics that offers various rehabilitation services.

Goff’s updated analysis came after CloudMD announced it was forming a new Public Sector Division within the company, as well as announcing various contract wins from state, local and public sector organizations across North America.

“We believe this update flexes the diversity of CloudMD’s product suite, while highlighting the Company’s success integrating acquired assets and talent into its ecosystem,” Goff said.

The intent of the new Public Sector Division is to combine the company’s experience in winning large-scale RFPs and contracts with an extensive history of successfully servicing public sector organizations across North America.

All told, CloudMD has secured 107 new contracts in January and February alone, with one of the biggest being a contract with the New York City Department of Education, where CloudMD will provide integration and technology services through its interoperability platform, as well as the United States government to deploy its Substance Use Disorder (SUD) solution to support the opioid crisis in North Carolina, which leverages the Company’s Real Time Intervention Platform (RTIP). 

“As a lifelong mental health caregiver, I have seen the toll stigma and lack of access to services can take on families. As a long time public servant, I saw the impact on people, our healthcare system and our economy. People need supports wherever and whenever they are ready – at home, at work, at school – and I am proud to be working with CloudMD and our public sector patient and employer partners across North America to provide effective, holistic, and timely care that improves health equity for patients, students, workers and their families,” said Colin Andersen, Head of CloudMD’s Public Sector Division in a March 3 press release.

In referencing the new contracts, Goff pointed back to the company’s acquisition of IDYA4 in December 2020, noting that the public sector wins leveraged the IDYA4 offerings and validated CloudMD’s acquisition roadmap and longer-term, holistic service strategy.

“We believe these US contracts collectively represent annual revenue potential north of seven figures, though importantly, the company anticipates significant opportunities to cross-sell its complementary offerings beyond these base revenues,” Goff said.

Goff did not alter any of his financial projections in his updated analysis, as he projects the company will generate $37.2 million in revenue in the final quarter of 2021 (consensus projection is $37.4 million) to end the year in nine figures at $100.8 million for projected year-over-year growth of 572 per cent. Looking ahead to 2022, particularly on account of contributions from the newly-acquired Mindbeacon, Goff projects a near doubling in revenue to $197 million.

In terms of valuation, Goff forecasts the company’s EV/Revenue to drop from the reported 11.7x in 2021 to 1.7x in 2021, then to a projected 0.9x in 2022. The 2022 projection represents a solid discount to the 2x peer group average, as well as to the target of 5.7x.

Meanwhile, Goff anticipates an expanded gross profit of $34.9 million in 2021 for an implied margin of 34.6 per cent. He then forecasts the margin to expand further to 35.6 per cent in 2022, paired with gross profit of $70.2 million.

From a valuation standpoint, Goff estimates the company’s EV/Gross Profit multiple will drop from the 2020 figure of 30.4x to 5x in 2021, then to a forecasted 2.5x in 2022, which comes in ahead of the peer group average of 3.7x, as well as the target of 16.1x.

“We highlight that beyond the valuation disconnect between CloudMD and its US peers, the Company is on track to nearly double its revenue y/y in 2022, while US peers are growing their top line at an average rate of just 23 per cent in 2022,” he wrote.

Goff also projects negative adjusted EBITDA in his forecasting period, expecting a $500,000 loss in 2021 and $1.5 million in 2022.

“With time, we could see the cross-selling revenues surpass the baseline contract values, which speaks to the diverse pipeline of products and services CloudMD has established,” Goff said. “We expect the contracts to run for one year with annual extensions thereafter, across an initial three-year period – these terms are common within the public sector, along with extended, competitive RFP processes.”

CloudMD investors were likely dreaming of a better return than the 69.3 per cent loss the stock has incurred over the last 12 months, punctuated by a 42.6 per cent loss since the start of 2022. The company’s 52-week high came on March 9 at $2.33/share, but after a similar peak in July, it has fallen off to the point of hitting a 52-week low of $0.62/share on March 2.