Newtopia stock downgraded by Research Capital

Reacting to new quarterly numbers from Canadian healthcare tech company Newtopia (Newtopia Stock Quote, Chart, News, Analysts, Financials TSXV:NEWU), Research Capital analyst Toby Ma has dropped the stock from “Speculative Buy” to a “Hold” rating in an update to clients on Wednesday.

Toronto-based Newtopia offers a personalized habit change platform that focuses on metabolic risk reduction by developing and implementing personalized experiences based on social, behavioral and genetic information.

Ma’s updated analysis came after the company released its fourth quarter financial results which according to Ma showed a lack of growth from the company.

“We are awaiting better visibility into how the company could re-gain fast growth going forward,” Ma said.

With some attribution going to seasonality in terms of new engagements and enrollments, Newtopia’s financial quarter was headlined by $2.4 million in revenue, which missed the Research Capital estimate of $3.4 million and the Reuters consensus of $3.2 million and was relatively flat compared to the $2.5 million reported in the fourth quarter of 2020.

Nearly all of the company’s revenue came from engagement fees, though the $2.3 million report missed on the $2.8 million RCC projection, as did the $0.1 million Welcome Kit sales in relation to its $0.6 million projection.

Company management cited the Omicron variant of COVID-19 as a mitigating factor for its slow quarter, though Ma is more concerned about the company’s lack of concrete guidance in terms of a growth rate for 2022, in addition to its lack of profitability after exiting the quarter with approximately $800,000 in cash compared to $2.2 million in debt.

“If COVID has a materially negative impact on NEWU’s revenue generation, in light of the surge of the Omicron sub-variant, NEWU’s revenue growth in 2022 could be further affected – a commercial risk,” Ma said.

Newtopia also reported a drop in engaged participants from 37,000 in the previous quarter to 35,250 in its updated results. Though the company reported year-over-year patient growth from 2020 to 2021, Ma suggests the lack of corresponding revenue could mean the company overstated the actual engagement activity by participants. 

“With the holiday season and the distraction of open enrollment for new benefits in the following year taking place for U.S. employers, the fourth quarter of the year is traditionally a slower period for new enrollments and engagements for Newtopia,” said Jeff Ruby, Founder and CEO of Newtopia in the company’s April 5 press release. “That headwind, along with the surge in the Omicron variant towards year end, impacted our fourth quarter revenue. While our 2021 results did not live up to our historical performance nor our long-term goals, we are experiencing strong momentum to date in 2022 and believe that our business has officially turned a corner.”

The new financial results have prompted Ma to revise his future projections across the board, effectively pushing his projections back one year.

After Newtopia finished 2021 with $10.5 million in revenue to miss on its indication of being in line with the $11.4 million figure from 2020, Ma lowered his 2022 estimate from $20.4 million to $14.8 million for a projected year-over-year increase of 41 per cent. Looking ahead to 2023, Ma lowered his projection from $24 million to $20.7 million for a potential year-over-year increase of 39.9 per cent, with 2024 now set at $24 million (previously $26.7 million) and 2025 projected at $26.5 million (previously $29.1 million).

In terms of valuation, Ma forecasts the company’s EV/Sales multiple to drop from the reported 2.4x in 2021 to a projected 1.7x in 2022, then continuing to descend to a projected 0.9x in 2025.

Ma has also modified his adjusted EBITDA projections, as he now forecasts a $3.8 million loss in 2022 compared to his initial $0.4 million loss projection. Ma still forecasts a positive turn in 2023, albeit at a reduced figure of $200,000 compared to the original $2.3 million estimation, eventually getting up to a projected $3.6 million (previously $5.7 million) in 2025.

Going forward, Ma said he will be keeping a close eye on the company to see if its new strategy will work out.

“NEWU has been working to diversify its product/service distribution channels from self-insured employers only to include Medicare Advantage operators (i.e. insurers),” Ma said. “We are waiting to see how this strategic change would help NEWU re-gain growth.”

Newtopia’s stock price has taken a nosedive to the tune of a 51.9 per cent loss over the last 12 months, and a 37.5 per cent loss since the calendar turned to 2022. The stock hit a 52-week high of $0.59/share on September 23, but it has gone down since, most recently hitting a 52-week low of $0.22/share on Monday.

With the update and downgraded rating, Ma lowered his target price on Newtopia from $0.70/share to $0.30/share for a projected return at press time of 20 per cent.