The Lifestance Health Group (NASDAQ: LFST.O), popped on its initial public offering (IPO). The outpatient mental health care provider began trading at $20 per share, above its initial target price of $18 per share. The company closed at $21.90 per share and earned a valuation of $7.5 billion, on its way to raising $800 million. In this article, we will discuss the key operating results of the business as well as its suitability for the investor.
Key Operating Results
In keeping with many other IPOs, Lifestance managed to combine world class revenues with a rather tenuous grip on profitability. According to the company’s S-1/A filing, the group grew revenue from $100.3 million in 2018 to $212.5 million in 2019. Revenue was $111.7 million in the Predecessor 2020 Period, and $265.6 million in the Successor 2020 Period, and increased to $377.2 million in 2020 on a pro forma basis. Furthermore, revenue increased from $73.1 million for the three months ended March 31, 2020 to $143.1 million for the three months ended March 31, 2021. This is a track record of remarkable growth that has only been helped by the global health crisis. The global pandemic has led to a mental health crisis, which many experts believe will last longer than the pandemic itself. Healthcare’s importance has risen as a result of the pandemic and there are many reasons to believe that there is a massive secular trend which will spur on growth in the sector.
Despite this significant growth, the company’s record of profitability is not particularly strong. The company earned a net income (loss) of $(1.1) million in 2018, $5.7 million in 2019, $(24.9) million in the Predecessor 2020 Period, $(13.1) million in the Successor 2020 Period, and $(270.9) million in 2020 on a pro forma basis. The degree to which the company’s profitability plummeted during the global health crisis is quite startling. That pattern of loss-making has continued into this year: for the three months ended March 31, 2020 and March 31, 2021, the company’s net income (loss) was $2.7 million and $(8.7) million, respectively.
Impediments to Profitability
The company serves an array of insurers, among them being Anthem and UnitedHealthCare. This is because insurers’ are facing a massive demand from their employer members who are eager to provide their employees with better mental health benefits. Typically, 95% of mental health providers work alone. LifeStance is able to bridge the divide between patient and mental health care provider. The company’s filings show that it has been opening a new office every 4.5 days. This is a big driver of the company’s inability to earn profits. The company has to invest in these new offices to reach more people. At the height of the pandemic, the group simply ramped up capital expenditure in response to need. The company is building a fully integrated care model, something which it believes will be a first for a for-profit company. LifeStance has also ensured that primary care practices also have mental health clinicians. Though the two sides operate separately, this model serves to ensure that a mental health care professional is on hand should a patient’s primary care doctor choose to refer their patient to a psychologist or psychiatrist.
It is evident that attaining profitability will be difficult to achieve within the near-term. The first reason is clear from the above: the company has to invest in building its fully integrated care model, and this means that there will not be any profits for investors. As demand increases, the company will increase expenditure. In the near-term, we should expect declining profitability rather than rising profitability. This is the price of building a business from the ground up.
The second reason is less obvious and far more counter-intuitive. LifeStance estimates that the outpatient mental healthcare market in the United States is worth about $116 billion as of 2020. Furthermore, the company believes that the market will nearly double between 2020 to 2025 at a compound annual growth rate (CAGR) of 14%, to approximately $215 billion, dur to secular trends such as the growing incidence of mental health-related disease, improved awareness and acceptance of mental health issues leading to increased demand, increased access and the pursuit of integration with physical care, as well as increased support from state and federal regulations. On the face of it, these can only be good things. Yet, the prospect of earning substantial and growing economic profits has a tendency of inviting competition, preventing any single competitor from attaining minimum viable economies of scale, and therefore making it impossible for anyone to earn significant economic profits. Though competition is good for the consumer, it is a terrible thing for businesses and their shareholders. It’s not surprising that investors have funded competitors to the tune of $1.5 billion since 2020. I know a great loan estimate when I see one, but I can’t say that this is a great investment opportunity.