LINK TO ORIGINAL ARTICLE: https://www.smallcapinvestor.ca/post/cloudmd-tsxv-doc-otc-docrf-the-future-of-telemedicine
Since the start of the COVID-19 pandemic, the demand for telehealth and virtual doctors appointments in North America has grown rapidly as more patients seek medical treatment while reducing the need for physical contact. The telemedicine sector might be hot but it still remains a largely untapped market and we believe it will stay strong for years to come. Similar to WELL Health Technologies, one of our previous picks, CloudMD is also leveraging the power of technology to enhance the overall medical clinic experience. Their goal is to create a comprehensive, streamlined one-stop shop for patients seeking medical care. With a strong cash position, CloudMD is well positioned to capture a portion of this largely untapped market by executing on their inorganic growth strategy (growth through acquisitions).
What does CloudMD do?
CloudMD offers SaaS based health technology solutions to medical clinics and healthcare providers across North America. They have developed proprietary technology that delivers quality healthcare through the combination of connected primary care clinics, telemedicine, and artificial intelligence (AI). CloudMD’s integrated telehealth technology is used in the medical clinic practice to provide patient centric, continuity of care. CloudMD currently provides service to a combined ecosystem of 376 clinics, over 3000 licensed practitioners and almost 3 million patient charts across its servers.
Recent Acquisitions
On August 6, 2020, CloudMD announced it has entered into a binding agreement to acquire 100% of a U.S. based medical clinic serving chronic care patients as a part of its broader strategy for entering the U.S. market with its comprehensive suite of telehealth products. The acquisition is an important and strategic part of CloudMD’s cross-border expansion plan into the United States and also distinguishes it from its main competitor WELL Health Technologies. The opportunity for expansion here is huge, as in the U.S alone, 90% of the $3.5 Trillion spent annually on health care is spent on chronic pain and mental health issues.
On July 28, 2020, CloudMD announced signing a definitive agreement to acquire South Surrey Medical Clinic, a premier provider of integrated medical solutions and an early adopter of telemedicine delivery. The Clinic has been able to streamline healthcare services and provide longitudinal and team-based patient centric care by offering a number of medical services from one location. South Surrey services over 60,000 patients and already uses online booking, EMR software and telemedicine that will be easily integrated into CloudMD’s software and clinic network.
We believe that these acquisitions are a step in the right direction for CloudMD as they will enable to the company to vertically integrate their technology into brick and mortar medical clinics. This is in line with their goal of creating a single comprehensive stop for longitudinal healthcare for chronic and complex care patients in North America. We believe that the synergies of this acquisition can be realized immediately, with CloudMD’s software being easily integrated into the brick and mortar clinic model to effectively enhance efficiency and profitability. The acquisition also proves that CloudMD is committed to executing on their inorganic growth strategy. Moving forward, with over $16 million cash, we believe the company will continue to acquire clinics and digital assets to add to their existing portfolio.
Relative Undervaluation
A compelling case for an investment into CloudMD is also supported by a relative undervaluation to its peer group. It is interesting to note that the peer group is very limited because there are so few companies operating in the space.
At present, CloudMD is being too heavily undervalued by the market based on a comparable analysis using EV/SALES(’21) as the primary metric.
From the table above, we can see that the enterprise value for CloudMD is around $92 million while the consensus estimate for 2021 revenue is $34.7million. So, EV/SALES(’21) = 2.6x. This is incredibly low, especially when compared with other companies in the peer group. WELL is currently trading at 9.8x EV/Sales(’21). TelaDoc is currently trading at 11.8x EV/Sales(’21). The peer group average is 8.1x. If we were to apply the industry average EV/SALES of 8.1x to CloudMD’s expected revenue in 2021, then CloudMD should be valued at around $280million CAD or $2.47 per share. It is our opinion that this value gap will start to close as CloudMD continues to acquire additional clinics and technology-related assets and capture a larger portion of the North American telehealth market.
A Technical Analysis Perspective
Now let’s take a look at the chart to see if we can try to predict where the stock might be headed next. Since we have a medium-term time horizon on CloudMD, we will use a 3-month chart.
The first thing we noticed is that from July to August, CloudMD’s stock was stuck in a downtrend. However, at the beginning of August, a wave of buying triggered a breakout past the resistance level, signalling a bullish reversal in the trend for the medium to long term.
Probably the most important aspect of this chart is the “gap” from $0.69 to $0.72.
Why are “gaps” useful? Because historical data shows that when a stock price gap is observed, there is a chance of 91.4% that it will get filled in the future. In layman's word, 9 in 10 gaps get filled; not always, but pretty close.
Looking at more recent trading history, we can see that the newly established support level is at $0.85.
We see two possible scenarios playing out here. Either way, what is important to keep in mind is that the long term trend has REVERSED and we expect this uptrend to continue over the medium to long term.
Scenario A: the stock bounces off the support level at $0.85 and immediately continues the upward trend.
Scenario B: the support level breaks down and the gap which we previously referred to will get filled. If this does happen, this is when the most opportune time to buy would be. As there is an earnings call on August 27th which should act as a catalyst for movement in the stock price.
OUR PRICE TARGET
Being an early mover in the largely untapped telehealth sector, CloudMD should be able to capture a significant share of the market via its cash position and inorganic growth strategy. We believe that over the long term CloudMD’s stock price will converge with its relative valuation of $2.47 per share, offering +174.4% upside from current prices.
