One Medical S-1: Post from Feb 2020
Beats the market by a little, still a story stock
At the time I wrote this tweetstorm, I had trouble deciding between the bull and bear case. Since then, it has tracked a little ahead of the market - but it has growing operating losses and the case is still out on whether it can build an enduring sustainable business.
1/ Better late than never- my teardown of the OneMedical S-1! OneMedical ($ONEM) is definitionally a story stock, not dissimilar to Tesla, Virgin Galactic or Uber.
2/ $ONEM financials alone don’t justify the sky high valuation: it trades at ~ a $3B market cap, ~ 11x revenue for a business growing <29% a year, with an operating burn of > $30M per year
3/ I was a bull on @peloton and a bear on @casper but $ONEM is more complicated. So let’s paint both the bull and the bear case.
4/ $ONEM macro is crazy compelling: @maveron we invest in old industries being radically redesigned in a customer-centric way. Health care is the ultimate low NPS industry - with 81% of customers dissatisfied with their healthcare.
5/ Can $ONEM redesign primary care so it meets patients needs; where they are served when and how they want? They are off to a great start with a 90 NPS, demonstrating they have a service customers love. The big question is whether they can turn it into a great business.
6/ As context, note “it is hard to make the case that changes to the delivery of primary care alone... can move the needle on cost.” https://www.pcpcc.org/sites/default/files/resources/pcmh_evidence_report_2019_0.pdf
7/ But the research does point to much better patient health from consistent primary care → more preventive services, less ER use, higher satisfaction with their health care. https://www.healthaffairs.org/doi/abs/10.1377/hlthaff.2010.0025?journalCode=hlthaff
8/ Can One Medical be better than others in reducing costs and improving quality? They say they’ve demonstrated a 41% reduction in emergency room visits and total employer cost savings of 8% or more. They have high employer retention at 97%.
9/ But does does $ONEM have a good business? Over time they’ll have to show they can take market share, replicably scale the service model and extract more profit (a share of dollars saved) in our messy employer-driven health care system
10/ To date, One Medical's great macro story doesn't translate into good unit economics. In 2019, gross margin improved from 35.1% to 40.4%. At the same time G&A showed no leverage, growing from 37% of revenue to 38.8%. Sales and marketing grew from 9% of revenue to 14.5%.
11/ It would help to see One Medical’s cohorts cut by geographic market, by employer and by units (comparing mature markets/clinics with new ones). The S-1 does not give that granularity of data so it’s hard to see if the mature markets generate cash.
12/ $ONEM needs to realize significant operating leverage as this business scales: (i) share in the economic upside from lower costs; (ii) leverage tech to increase efficiency / patients per clinician and (iii) expand to Medicare. Or they’ll need to productize their technology
13/ To justify the $ONEM valuation, you also have to believe their giant investment in growth, as shown by combined G&A and sales & marketing expense at over 50% of revenue, will significantly increase growth. Put differently, why isn't it growing faster now
14/ $ONEM has the risk profile of a Series A venture investment. It loses money in the vast majority of outcome scenarios, but if they achieve their vision there is a 10x+ upside from here
15/ I’m cheering for $ONEM from the sidelines - it’s rare to see a company with this level of ambition to catalyze systemic change.