Is Oscar Health a Buy?

Oscar Health‘s (NYSE:OSCR) initial public offering has proven to be a major flop despite having a top-rated health insurance business. Over the past six weeks, its shares are down 41.5% from their initial price of $39 apiece. With such a steep sell-off, many investors might be wondering if now is a good time to buy the dip.

Health insurance is a hypercompetitive industry. To acquire customers, Oscar Health is reinvesting a lot of its cash flows into growth, as well as reinsurance so the company could not be forced into bankruptcy if unforeseeable events led to a sudden rise in large medical claims. Its way of doing business has put off risk-averse investors. Luckily, it does have a very promising business model, one that can likely enrich those who understand it. 

Woman presenting health insurance card to clinic.

Image source: Getty Images.

The bear case for Oscar Health

In 2020, Oscar Health’s revenue decreased by 5.2% to $462.8 million, which is always bad news for a growth stock. At the moment, the company has a market cap of $4.6 billion, about $1.914 billion in cash, and $200 million in debt, giving it an enterprise value (EV) of $2.89 billion.

In other words, its stock is trading at 6.2 times EV/sales, which is crazy considering its competitors, such as Humana (NYSE:HUM), are profitable at much lower ratios (Humana’s is 0.6 EV/sales). Meanwhile, Oscar Health’s net loss accelerated from $261.17 million in 2019 to $405.92 million last year. The company has lost $1.427 billion since its inception in 2011.

What’s more, Oscar Health’s premiums are pretty expensive, coming at an average of $515 per month, increasing 9% over 2019. That pricing will make it more difficult for Oscar Health to win customers in the 18 states it operates in. 

The bull case for Oscar Health

It’s clear that the company’s founders designed its business model with long-term sustainability in mind. Over the past year, Oscar Health’s direct policy premiums actually grew by 72.5% to $2.29 billion. However, the company paid out 72.8% of premiums to transfer the claim risks to reinsurers. This ensures that if a force majeure (such as a global pandemic) led to a sudden increase in large claims, it won’t bankrupt the company.

Large insurers have minimal reinsurance expenses, as the premiums they collect are substantial enough to absorb unexpected losses. It suffices to say that once Oscar Health reaches a certain size, it could cancel its reinsurance treaties and assume all the risk and profits for its premiums. Before that, however, the company has a decent medical loss ratio of 84.7%, which improved by 12 percentage points from 2017. Despite a substantial improvement, it is still a bit below the industry average of 79% — though that’s not necessarily a bad thing, especially for patients.

What’s more, Oscar Health has introduced many innovative features for its membership, which is growing at 59% per year and currently stands at 529,000. The first is its Doctor on Call service, which allows patients to seek a telehealth visit at any time. It also has a convenient online app. Finally, the company offers a $3 copay on certain classes of prescriptions and prescribes items like birth control and smoking cessation drugs for free.

For these reasons, Oscar Health boasts an impressive 68% customer satisfaction rate compared to an industry average of 45%. No one seems to particularly hate its policies, either. The company has a complaint ratio of 0.12, meaning it has one consumer complaint for approximately every $8.3 million of revenue it generates. That is, again, better than the industry average. In places where Oscar Health operates, it already has about 10% market share.

What’s the verdict?

If we value Oscar Health by dividing its EV by its gross revenue, we get a multiple of 1.26. The result is still a premium compared to sector players but is well justified considering its fantastic growth rate in terms of direct premium earned — which it can keep fully after reaching a decent size and skip out the reinsurers. We know that Oscar Health has an excellent insurance product and that all it needs is enough capital to scale. Fortunately, a cash infusion from its recent IPO did precisely just that. 

I do not doubt that as soon as the company reaches a sufficient size, it can skip the reinsurance costs and keep all premiums for itself without the risk of catastrophic loss. Now looks like an excellent time to buy the dip on this healthcare growth stock. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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