The virtual healthcare industry is expected to become an integral part of the global healthcare sector in the future and Wall Street is placing bets on budding telehealth companies. Telehealth company American Well Corporation’s (AMWL) impressive annual results have caught the eye of Street analysts, who expect AMWL’s share price to rise significantly in the near term.

AMWL’s total active providers increased 950% year-over-year to 72,000 in the fiscal year ended December 31, 2020. Its total visits rose 400% from the year-ago value to 5.90 million.

Ahead of a potential fourth COVID-19 infection spike, Wall Street analysts have upgraded their price targets on the stock. However, with inadequate cash flows and operating profits, AMWL may not be able to maintain its momentum.

Click here to checkout our Healthcare Sector Report for 2021

Here’s what we think could shape AMWL’s performance in the near term:

Telemedicine Industry Outlook for 2021

The COVID-19 pandemic has accelerated the adoption of virtual healthcare as the public has sought to avoid hospitals and in-patient care. According to a report published by McKinsey, healthcare providers have increased their virtual offerings to accommodate 50 to 175 times the number of patients since the pandemic. Furthermore, approximately $250 billion of U.S. healthcare spending can be virtualized. The global telemedicine industry is expected to grow at a CAGR of 37.2% over the next six years to hit $171.81 billion by 2026.

A potential fourth wave of coronavirus infections should help the telehealth industry to consolidate its position in the overall healthcare sector as people again avoid COVID-19 infested hospitals. With mutant strains of the virus expected to be more contagious and severe, hospitals globally are expected to scale up their virtual operations.

Weak Financials

AMWL has generated $245.27 million in revenue over the past year, up 64.8% year-over-year. Its trailing-12-month gross profit stood at $88.48 million, translating to a gross profit margin of 36.07%. However, the company’s operating profits and net income are still in the red. Despite its EBITDA rising 154.3% year-over-year, AMWL’s trailing-12-month EBITDA came in at negative $217.28 million.

Also, the company is still unable to generate stable cash flows from its operations. Its trailing-12-month net operating cash flow and levered free cash flows are negative $112.46 million and $26.22 million, respectively. With 99.9% of AMWL’s capital funded by equity, its trailing-12-month ROE stands at negative 28.21%.

Consensus Rating and Price Target Indicate Potential Upside

Of  six Wall Street analysts that rated the stock, three rated it Buy and three rated it Hold.

The stock has a 12-month average price target of $30.33, indicating a potential upside of 79.6%. The price target range is  $21– $41.

Relative Overvaluation

In terms of forward EV/sales, AMWL is currently trading at 11.64x, 71% higher than the industry average of 6.81x. Also, the company’s forward price/sales multiple of 15.8 is more than double the industry average of 7.08.

POWR Ratings Reflect Bleak Outlook

AMWL has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

AMWL has a D grade for Value and Quality, and C for Growth. The company’s relative overvaluation and operational losses account for its Value and Quality grades. The company is yet to grow significantly to generate periodic net profits, justifying its Growth grade.

Among the 79 stocks in the C-rated Medical – Services industry, AMWL is ranked #73. In total, we rate AMWL on eight different levels. Beyond what we’ve stated above, one  can get AMWL Ratings for Momentum, Sentiment and Stability here.

There are 23 stocks in the Medical – Services industry with an overall rating of A or B. Click here to view them.

Bottom Line

AMWL’s weak operating margins make its current and projected price gains highly unstable. Moreover, as governments focus on revamping the infrastructure and production segments, the focus on healthcare is likely to take a back seat for now. Amid such circumstances, we think it could be wise to avoid AMWL.

Click here to checkout our Healthcare Sector Report for 2021

AMWL shares were trading at $16.85 per share on Thursday afternoon, down $0.04 (-0.24%). Year-to-date, AMWL has declined -33.48%, versus a 9.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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