Amidst all the hype that Lemonade (IPO), Root (IPO), Metromile (SPAC-led debut) and other insurtech players have generated in the last year, it’s been easy to forget about Oscar Health. But now that the company founded in 2012 is approaching the public markets, one of the early tech-themed insurance companies is catching up on the attention front.
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So this morning we’re digging into Oscar Health’s first IPO pricing interval, hoping to understand how the market is valuing its unprofitable health-insurance enterprise.
Recall that Oscar Health was valued at around $3.2 billion in March of 2018. That datapoint, via PitchBook, is dated. Oscar Health raised hundreds of millions since (per several venture-capital tracking databases, including Crunchbase) but we lack a final private valuation for the company.
Regardless, with Oscar Health now targeting a $32 to $34 per-share IPO range, we can get our hands dirty.
Let’s get some valuation numbers and then decide if Oscar Health feels cheap or expensive at that price.
Billion-dollar IPO
Oscar Health is looking to reap as much as $1.21 billion in its IPO, a huge sum. The company is selling 30,350,920 shares, with 4,650,000 additional shares reserved for its underwriters. Existing shareholders are selling another 649,080 shares.
This means that after the IPO, Oscar Health will have 197,037,445 Class A and B shares in circulation, or 201,687,445 after counting shares reserved for its underwriters.
Using the company’s $32 to $34 per-share range, we can calculate a valuation minimum of $6.31 billion for the company (lower share count, low-end of price range) and $6.86 billion (higher share count, high-end of price range). That’s the company’s simple IPO valuation.
Oscar Health may also sell up to $375 million of its shares at its IPO price to three different funds. The company advises that the “indication of interest is not a binding agreement or commitment to purchase,” so we can ignore it for now.
Turning to diluted worth, we need to tally more shares. To get a diluted share count, we want to include shares that may be issued and are already earned — if an employee has vested stock options, we’ll count those shares now. Renaissance Capital calculates the company’s fully diluted valuation at the midpoint of its price range to be around $7.7 billion. TechCrunch gets a slightly higher number, but it’s somewhat immaterial as we’re estimating the value of vested stock options that may or may not be immediately exercised.
Using that $7.7 billion number for now, how is Oscar Health priced? Like a tech company? Yes? Oddly? Yes.
At $7.7 billion in worth, the company’s full-year 2020 revenues of $462.8 million gives Oscar Health a revenue multiple of 16.6x.
That’s SaaS-like! For a company that shrank last year! That has the equivalent of negative gross margins!1
We have seen some very silly stuff in the IPO market over the last 12 months. I have mostly nodded along because I don’t really care how other people value growth stocks, and I can actually summon arguments to mind concerning here and there as to why some tech shops deserve huge multiples.
Oscar Health is not such a company.
Anthem, to pick another insurance company from the hat, trades at 0.63x its trailing revenue. And the closest it gets to a 16.6x ratio if its current price/earnings ratio that comes to 16.41 (data via Yahoo Finance.)
Er, why is Oscar Health, which shrank, and lost money last year worth so much more per dollar of revenue than Anthem, which grew last year and generated $4.6 billion in net income? Not to mention more than $7 billion in EBIT?
I don’t get it.
Not that I want to be rude about Oscar Health, per se. If this is the price the market will pay, cool. Sell the stock, and then try to get the business on a better footing. But the interest in paying $34 per share for Oscar Health is hard to square with other data points we can see in the market.
The clear takeaway from the first Oscar Health IPO pricing interval is that public investors have lost their minds. Go public now.
1Using Oscar Health’s “InsuranceCo Combined Ratio” as a stand-in for gross margin in this case.