Oscar Health (NYSE:OSCR) turned profitable in Q1 2024 and is expected to be profitable for the year. This is likely sustainable, as the company could maintain profitability in future years as well. The reason for the sustainability of profits is due to Oscar Health’s efforts to reduce expenses, by gaining variable cost efficiencies, by increasing fixed cost leverage, and through lower risk adjustment as a percentage of premiums. The stock’s recent pullback could present a good buying opportunity. However, there are some uncertainties to be aware of beyond 2025.
Oscar Health’s Business Background
Oscar Health provides health insurance in the United States, where the company scaled up to over 1 million members. OSCR’s insurance includes health plans for individual and small group markets. The company also offers +Oscar, a tech platform that assists providers and payors to shift to value-based care. Oscar Health also offers reinsurance products. The company is focused on optimizing its member experience and its cloud-based platform.
Oscar Health’s Profitability Improvements and Growth Catalysts
Oscar Health’s efforts to increase margins to improve profitability is the main catalyst for the company going forward. OSCR has been increasing margins through multiple strategies. One strategy is scaling up and driving membership growth to increase revenue growth. Revenue increased by an impressive 46% in Q1 2024 to $2.1 billion over Q1 2023. The strong growth was attributed to above-average membership growth during open enrollment SCP (specialty care provider) member additions, while achieving strong retention. Oscar Health is diligent with offering competitive prices, which helps to grow memberships.
Another strategy was to pull out of the Medicare Advantage business, which was not profitable for Oscar. OSCR felt that the provider relationships that were in place were not sustainable and that they were not able to fix the situation to convert them into profits. The large increase in revenue growth plus the exiting of the Medicare business resulted in Oscar achieving its first profitable quarter. The operating margin was just under 9%, the EBITDA margin was 9%, and the net income margin was 8% for Q1 2024 as compared to negative margins in Q1 2023 and all previous quarters prior to 2024.
Oscar Health has been building its overall strategy around the current trends in the healthcare industry. This includes consumerization, digitization, and the shift to personalization. OSCR’s strategy to capitalize on these trends includes: retaining existing members, acquiring new members, introducing new products/health plans, expanding into new markets & lines of business, and by monetizing its +Oscar platform.
The +Oscar platform addresses consumerization (adapting technology and tools to meet consumer’s needs) by directing members to the right care at the right time. The platform takes complex member-specific workflows and turns it into a user-friendly experience for non-technical users. The platform uses digitization as it converts member information into digital form. It addresses the shift to personalization by building trust and engagement with members as the platform routes members to care that is specific to their needs while saving them money.
Here are some statistics that back up the claims regarding the +Oscar platform:
- 9x higher mobile app downloads
- 90% member retention
- 13% ER reduction
- 15% increase in annual wellness visits
- 20% reduction in virtual no-show rates
- 75% of members use Care Router
- 2/3 choose a recommended provider
- About 7% cost savings for members
- 20% administrative cost reduction for +Oscar partners
The exiting of the Medicare business and the strong scaling of revenue through Oscar’s strategies and +Oscar platform should help to drive profitability going forward.
Attractive Valuation
Since Oscar Health hasn’t been profitable prior to 2024, the price/sales ratio should be the most appropriate valuation measure for the stock. OSCR is trading with an attractively low trailing price/sales ratio of 0.55 and a forward price/sales of 0.42. P/S ratios below one are considered undervalued. The Healthcare Plan industry is also trading with an attractive low trailing P/S ratio of 0.61. Oscar is trading attractively below its industry.
The company is expected to achieve an impressive revenue increase of 51% in 2024 to $8.87 billion, according to consensus estimates from Oscar Health’s four covering analysts. Oscar Health is off to a great start with the 46% revenue increase in Q1. I think Oscar can achieve its revenue estimate for the year as the company scales up with the +Oscar platform and its growth strategies.
Oscar is also expected to turn a profit for the full year of 2024 with an estimate for EPS of $0.05. This looks feasible with the strong increase in revenue and the elimination of the non-profitable Medicare business leading to an increase in margins.
Technical Perspective
Oscar Health (OSCR) Daily Stock Chart with RSI (TradingView)
The stock recently sold off significantly about 33%. This brought the stock down to an oversold condition on the RSI. The sell-off resulted from a downgrade from Bank of America (BAC). BoA downgraded OSCR to Neutral from a previous Buy rating. Bank of America stated that 85% of the direct policy premiums that Oscar’s members paid were subsidized by advanced premium tax credits [APTCs]. These APTCs have been extended through 2025. However, the fear is that they could expire and not be extended after 2025. Bank of America put a 50% chance that the subsidies will expire. This is the biggest risk for Oscar Health in my opinion, as the expiration of subsidies could lead to less revenue growth and a narrowing of margins. The expiring of APTCs could cause Oscar to return to being unprofitable.
On the bright side from a technical perspective, there is a hidden bullish divergence on the daily chart. The stock made a higher low from April through June. At the same time the RSI made a lower low. This divergence typically results in a price reversal to the upside from what I have observed.
Of course, we may need to get clarification on an extension of the APTCs beyond 2025 to catalyze the stock to new highs. The stock could also experience a technical bounce higher since it is oversold and the company is likely to be profitable in 2024 and probably in 2025.
Another risk for Oscar Health is the potential failure to monetize its +Oscar platform. Oscar Health might be required to obtain licenses and approvals in new and existing markets including for 3rd party administrative services, pharmacy benefit administration, and other services. Obtaining these approvals could take longer than expected, leading to delays in earning revenue.
The company could also experience slower growth than it has in the past. Oscar Health could struggle to add new members or to retain existing ones. It is possible that members could find more attractive options in the Marketplace.
Oscar Health’s Long-Term Investment Outlook
Currently, the uncertainty of the APTCs expiring or not beyond 2025 is weighing on the stock. News of an extension of the APTCs would likely catalyze the stock higher. In the meantime, the Q2 earnings report scheduled for August 8, 2024 could be a near-term catalyst. Also, there is the possibility of the stock to bounce higher from the current oversold condition.
The longer-term hinges on Oscar Health getting an extension for the APTCs. If the company assures investors that Oscar could thrive with an extension or not, it could cause the stock to return to an upward trajectory.
Oscar Health looks good at least through 2025. The valuation is attractive, and the company achieved profitability. However, potential investors may want to wait for more clarity on an extension of the APTCs. Because of that uncertainty, I would rate the stock a HOLD.
Read the full article here