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Oscar Health (NYSE:OSCR) is a US-based insurance tech company founded in 2012. It focuses on the use of technology, such as telemedicine and transparent claim pricing system, to help create better access to insurance for most people.
OSCR has been on a momentum over the past year, though if we zoom out a bit, the overall share performance has been disappointing. After its IPO at a price of $31 in 2021, OSCR briefly reached its all-time high of $35 before plunging to merely $8 at year’s end. The stock had mostly traded sideways until the end of 2023, when it started to gain some steam likely due to improving unit economics and promising early progress in its new provider-sponsored business line, +Oscar. The narrowing losses and raised FY outlook also helped boost share price further, in my view.
Currently, OSCR is trading at $15 price level, up over 109% over the past year. However, OSCR still has lost over 50% of its value since IPO.
I rate OSCR a buy. My 1-year price target of $18.6 presents about 24% upside from the current trading price of $14.9. I believe OSCR will benefit from some catalysts to unlock growth and margin expansions in FY 2024.
Financial Reviews
Fundamentals are mixed. Revenue growth has normalized to 42% in FY 2023, having seen triple-digit growth rates in the previous two years. Meanwhile, net losses have narrowed significantly since IPO. In FY 2023, OSCR saw a net loss margin of -4.6%, a YoY improvement by almost a factor of 3. However, cash generation has been disappointing compared to prior year’s, with OSCR pretty much losing over -$272 million of cash from its operations in FY 2023.
OSCR has raised roughly $1.7 billion of cash from debt and equity issuance since its IPO, including the IPO proceeds. However, the relatively solid operating cash flow (OCF) generations, especially in 2022 and 2020, have also contributed strongly to the overall liquidity position. As such, the weak OCF performance in FY 2023 appears to have made a noticeable negative impact on liquidity, which was down by over 13% to just under $2.6 billion in FY 2023. Meanwhile, the debt level has been under control, as illustrated by the relatively steady debt-to-equity (DE) ratio.
Catalyst
I believe OSCR stands to benefit from a few potential growth and profitability drivers that should help deliver its sustainable growth objectives in FY 2024 and beyond. The continued strength in the ACA market, driven by the expanded subsidies into 2025, should help OSCR to benefit from increased memberships through open and special enrollments.
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In 2024, marketplace enrollment reached a record high of over 21 million, which has helped OSCR to surpass its earlier projection and to expect over 1.3 million members. Effectively, the strong increase in memberships should not only unlock future growth opportunities but also margin expansions.
In my opinion, the future growth opportunities lie in potentially stronger retention at scale. The key to stronger retention would be better member experience, which I believe OSCR could deliver due to its solid technology capability. Today, OSCR remains the only insurance tech player with a full stack platform that has developed and fully owned its claims, member-facing, and provider-facing systems, differentiating it from its competitors. Consequently, this allows OSCR to effectively streamline bottlenecks and leverage needed insights and new technology to create better experience.
For instance, the management has indicated that OSCR will be deploying AI extensively to help achieve its goal to drive better member experience during the Q4 earnings call:
We enhanced our member services IVR and launched an AI-powered secure messaging feature. Self-service features like these make it faster and easier for members to get the answers they need and allow our care team to support more complex member needs. While membership increased this open enrolment, call volume remained steady, call abandonment rates decreased and member satisfaction increased. We are making our superior member experience and innovative technology available to others in the health care system, enabling a higher quality experience for consumers and driving better engagement outcomes and business performance for clients.
Source: Q4 earnings call.
Furthermore, the overall shift in membership mix towards younger demographics will serve as a margin expansion driver, in my view. As commented by the management in Q4 earnings call, OSCR saw a noticeable increase in younger members:
but overall, when we look at the demographics and kind of the morbidity of the group that we’re seeing, I would characterize it as, number one, it’s younger and so, we certainly with this growth have seen, younger members coming in more than a little more than a year younger in terms of the total population.
Source: Q4 earnings call.
The younger demographics should ideally drive margin expansion due to the potentially lower overall healthcare costs for OSCR. For instance, there is lower likelihood for younger people to make high-cost insurance claims. Moreover, it is also more likely for the premiums to be more predictable within the younger segments, which should improve underwriting’s unit economics, in my opinion.
Risk
One of the major risk factors to my thesis would be the possibility of ACA subsidies being removed under the new administration post US election. This topic was also brought up during the Q4 earnings call, as asked by one of the analysts:
I get a lot of questions on the Affordable Care Act subsidies, and there are some government estimates out there of, if the subsidies were to go away, what would happen to the market size and so just wondering, one, if you have any comments on what you’d expect it to do to the market, maybe relative to like what your mix of members look like relative to who is using the APTCs.
Source: Q4 earnings call.
Though the management appears to have anticipated the less ideal scenarios, I would expect that subsidies removal, if any, to still result in a considerable pressure to the overall business.
Another risk factor to consider would be the rather elevated share price level today, which may potentially increase share price volatility. As per my earlier overview, OSCR is currently trading near $15, already up by over 64% YTD. In my opinion, the situation at present could suggest that a lot of the upside might have been priced in.
Valuation / Pricing
My target price for OSCR is driven by the following assumptions for the bull vs bear scenarios of the FY 2024 projection:
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Bull scenario (70% probability) assumptions – I expect OSCR to achieve an FY 2024 revenue of $8.4 billion, a 43% growth, in line with the market’s estimate. I assume a forward P/S to remain at 0.56x, implying a share price appreciation to $20.
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Bear scenario (30% probability) assumptions – OSCR to deliver FY 2024 revenue of $8.2 billion, missing the low end of the market’s revenue estimate by about -1%. I assign OSCR a forward P/S of 0.4x, projecting at best sideways price action into FY 2024.
own analysis
Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $18.6 per share, projecting a potential upside of about 24%. I would rate the stock a buy.
As a side note, my assignment of 70-30 weighted probability for bull and bear scenarios is mostly due to the strong catalysts at present, which I believe increases the likelihood of OSCR hitting the upper end of the market’s estimate.
Furthermore, OSCR also remains the more attractive option compared to its peers such as Clover Health (CLOV) or Bright Health (NEUE), in my opinion, mostly due to its better financial position and outlook. OSCR is only slightly valued higher than CLOV and NEUE, which both trade at 0.16x and 0.03x P/S. Nonetheless, it is worthwhile to consider that all of these players are still trading under 1x today, demonstrating the broader lack of market confidence. With that in mind, OSCR remains the company best positioned to exceed market expectation, in my opinion.
Conclusion
OSCR appears to be benefiting from several catalysts that may potentially help drive margin expansions and growth in FY 2024. Continued strength in ACA enrollment presents a key growth driver. Moreover, the shift towards younger demographics in the membership mix should also unlock margin expansions due to the projected lower overall healthcare costs and steady premiums. My 1-year price target of $18.6 presents a potential upside of 24%. I rate the stock a buy.
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