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Echelon Capital drops its target price on CloudMD

The stock is down plenty over the past year but Echelon Capital Markets analyst Rob Goff is staying bullish on Canadian health tech company CloudMD Software and Solutions (CloudMD Software & Services Stock Quote, Chart, News, Analysts, Financials TSXV:DOC), maintaining a “Speculative Buy” rating in an update to clients on Tuesday while lowering his target price.

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. The company also operates a network of interconnected medical clinics and its Re:Function, an integrated network of eight rehabilitation clinics that offers various rehabilitation services.

Goff’s target drop comes as part of a bigger reduction to digital healthcare valuation multiples, reflecting higher cost of capital provisions despite the company reporting better than expected financial results for the first quarter of its 2022 fiscal year.

CloudMD’s quarter featured $41.4 million in revenue to beat the Echelon estimate of $40.2 million, with the beat supported by the first reporting period to feature MindBeacon since CloudMD completed its acquisition in the middle of January, which sent the company’s enterprise health solutions vertical up 40.1 per cent sequentially to $26 million.

However, that success was slightly offset by the company’s digital health solutions vertical, which saw lower contributions as CloudMD looks to regain traction with its US VisionPros business coming back online in June, though it meant a decline of 45.1 per cent sequentially to $5.6 million.

CloudMD did experience success in its margins, as the reports of $13.5 million in gross profit and a $1.6 million adjusted EBITDA loss represented beats in relation to the Echelon estimates of $12.9 million in gross profit and a $2.1 million adjusted EBITDA loss.

“We are seeing momentum in client acquisition as employers recognize the positive impact of our connected health ecosystem, starting with our unique nurse-led in-take. We are providing measurable improvements in employees’ health and wellness and reductions in absenteeism, driving significant return on investment,” said Karen Adams, Interim CEO and President of CloudMD in the company’s May 30 press release. “As you’ve heard from us repeatedly, we remain focused on cost control, realizing synergies, and profitable execution. We have a strategic plan that focuses on leveraging our core assets, maximizing returns for our clients and shareholders, and achieving sustained profitability.”

According to Goff, company management outlined key priorities for the rest of 2022, including continued diversification and growth of its client base through cross-selling capabilities, geographic expansion, and providing innovative customer service to drive improved operational execution, along with finding sustainable paths forward in terms of profitability and corporate governance.

Despite the first quarter beats, Goff has lowered his most immediate financial estimates for the company, dropping his second quarter revenue projection from $44.8 million to $40.4 million which led to a new annual target of $181.5 million (previously $189.8 million) for a potential year-over-year increase of 77.4 per cent. Looking ahead to 2023, Goff projects more modest growth to $204.8 million for a potential year-over-year increase of 12.8 per cent.

In terms of valuation, Goff forecasts the company’s EV/Revenue multiple to drop from 1.3x in 2021 to a projected 0.7x in 2022, then to a projected 0.6x in 2023, which would present a discount to the peer group average of 1.6x, along with the target of 2.5x.

On the margins, Goff lowered his gross profit estimate from $15.2 million (33.9 per cent margin) to $13.6 million (33.7 per cent) for the upcoming quarter, while his 2022 projection is now set at $62.3 million with a margin of 34.5 per cent. For 2023, Goff forecasts a wider margin of 36.3 per cent ($74.4 million gross profit), along with an EV/gross profit multiple of 1.8x to significantly outpace the target of 6.8x, along with the peer group average of 11.6x.

Meanwhile, Goff continues to project losses in adjusted EBITDA through 2023, when he expects a positive turn of $4.7 million for a 2.3 per cent margin. 

Despite the target drop and industry outlook, Goff still casts a somewhat positive view of CloudMD. With the reiterated “Speculative Buy” rating, the analyst has lowered his his target price from $2/share to $1.80/share for a projected return of 246.1 per cent at the time of publication.

“We are optimistic that as CloudMD executes toward a return to EBITDA-positive operations post-MindBeacon, its progress will represent a significant positive catalyst, while the additional cash generation will enhance financial flexibility and enable greater access to lower cost forms of capital,” Goff said. “While investors await positive EBITDA results, we reference the attractiveness of CloudMD as a potential takeover/merger candidate.”

CloudMD’s stock price has dropped by 57.4 per cent in 2022, falling off after starting the year trading at $1.15/share, though it has recovered slightly since hitting a 2022 low of $0.39/share on May 12.

About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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