martin-dm/E+ via Getty Images

martin-dm/E+ via Getty Images

Phreesia (NYSE:PHR ) is a healthcare technology company that seeks to remove the need for papers and staff in the clinical information setting. When first established, the company sought to target the underserved private clinic industry, typically less than five physicians. This is because historically, medical technologies were targeted towards large corporations or companies of scale, rather than small businesses. Within a short time, Phreesia grew to be the leader in paper replacement services for clinics, with services such as check-in, payment, and insurance processing, all on a cloud-based portal. Initially established in 2005, the company now sees more than $50 million in quarterly revenues and helps to facilitate over 100 million patient visits annually.

Certain aspects of the company are unique. First, the platform is focused on the patients ease-of-use and enjoyment, rather than the clinic staff. Utilizing a lower-than-competitor, cost-saving device, the Phreesia Pad, a new source of revenues was now available: advertisements. In fact, this was the major source of revenues at one time. Now, mobile and software applications allow for diversified applications beyond just small clinics, with a combined SaaS and POS business model. The company even gains advertising revenues by tailoring personalized ads for each patient. All in all, Phreesia is attempting to disrupt legacy healthcare IT applications by being easier to use and automated, more customizable and scalable, and allow for cost saving at the same time.

However, there is one glaring issue: a history of 15 years of operations and yet still heavily invested in growth. In this article, I will continue to dissect this rapidly growing, innovative healthcare software company, but highlight how risk remains moving forward. One issue for growth is that private practices seem to be shrinking in the US as physicians move towards larger corporations. This is a bad sign, even if Phreesia continues to take significant market share. Larger corporations or hospital groups have long-term contracts with a slew of technology providers, and this is far too much competition for PHR. Further, telehealth companies are also incorporating similar features in their platforms, such as app based check-in, and are reducing the overall numbers of in-patient visitations. Will these issues continue to drive losses as the company attempts to find growth?

So far, 2021 showed that Phreesia is able to maintain their momentum. Important growth metrics such as revenues, revenue per client, total clients, and payment volumes all reached high points over the past four quarters. While revenues failed to grow at the same rate during the early stages of the pandemic, they took off in 2021. The multiple quarters of 40% growth or more is a good sign, but it will be important to watch for a tapering off in momentum as interest rates increase and overall spending decreases.

There is one big risk to the revenue growth that I foresee. This is the fact that the company’s business plan was developed in the 2000s, far before any touch screen system had any wide prevalence. As such, it was easy to expect significant demand for their Phreesia Pad product for the clinical setting. However, dozens of manufacturers and millions of large-size touch-screen devices exist and it is fairly easy for proprietary applications to be developed for them. As such, Phreesia loses some competitive advantage, and this limits overall growth and forces the company to consider patients first, with targeted advertising and ease of use.

One data point we can consider as a signal for competitive weakness is the poor profitability. Typically, the healthcare industry is able to maintain significant margins regardless of the industry. As an example, SaaS provider, Veeva (VEEV), has had positive EBITDA since IPO while growing at a similar high rate. Similar to the issue I brought up earlier, Veeva’s platform is a cloud-based system that can be used on a variety of devices. I also consider Phreesia risky as they have had at least a decade to expand to a profitable state. Further if we consider that Phreesia is more of a consumer facing business, targeting value towards patients visiting the clinic rather than the clinic themselves, we can expect lower margins and volatility as economic and reputation factors tie in.

As losses pile up and uncertainty revolves around the once innovative business model, the share price has taken a tumble. This comes even as revenue growth remains strong thanks to a post-pandemic return to clinics. The share price is now close to all-time lows, and the valuation is already in foreign territory at 4.5x P/S. I expect investor sentiment will remain quite poor if losses continue to be as high as they are now, and revenue begins to fall or stagnate. I even think the current P/S is quite high, and would not be surprised if it fell further. Just look at Teladoc (TDOC) and their sell-off as losses continue to pile up.

Phreesia faces stiff competition from telehealth and app-based platforms, and this prevents me from finding the company worth investing in. While some may believe that Phreesia missed their chance by not expanding into their private clinical practice setting at a faster rate, I find that the main issue is that the company has failed to find their profitable niche. Expansion should not be prioritized for the sake of profitability, especially since the platform is already used by over 2,300 healthcare organizations. The shift from the Phreesia Pad to an app system shows how strong competition is, and how the company is no longer innovative. Also, the main new driver of value, Advertising, has the slowest growth rate at the moment, and fails to increase profitability by a meaningful amount.

Moving forward, I would look to the company to enjoy the niche they have, and continue to provide high-quality services to current customers. Scaling back growth, and reinvesting more into R&D rather than Selling and Marketing, would be my choice of action. This is especially true for Phreesia as SM expenses reached close to 60% of quarterly revenues as of the most recent earnings. For now, it is a pass from me, and I would not even consider beginning to accumulate shares at current prices. There is too much weakness in the market, and the company, and there are better fish in the sea.

Thanks for reading, let me know if you agree below.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.