Why WebMD is like Groupon - But I'm Buying!
Internet advertising is in a bubble, which explains why I'm short both Pandora (P) and Groupon (GRPN) here on CAPS.
But there is more to the internet than high-priced daily deal and general media advertising. WebMD is a perfect example of the part of the internet where advertising prices aren't inflated. It also happens to be one of the few dotcoms where future earnings aren't overly inflated, either.
Analysts are particularly concerned about WebMD's advertising model, which is under threat from the FDA. Changes to regulatory codes could kill off a very valuable slice of its business; reducing the total revenue derived from display advertisements as direct-to-consumer marketing falls by the wayside.
This doesn't present a real threat to WebMD's business, however. Here's why:
1) Prescription ad revenues are falling anyway - By 2012 Lipitor, Seroquel, Zyprexa, Diovan, and Plavix, all massive money generating prescription drugs, will go generic. (Source.) Generics will affect greatly the need to advertise prescription drugs, and cut into WebMD's business, regardless of the FDA decision.
2) Local advertising - Local advertising is a massive growth market for online media businesses. As more and more doctors, dentists, therapists, etc., realize the benefits of marketing online, their adspend will naturally flow to authority web properties like WebMD. The race for local advertising is only beginning--and local ads remain some of the most valuable.
3) Wellness Business - Unbeknownst to most investors, WebMD has a very valuable "wellness" business, which provides services that help businesses reduce their total health care costs. Currently, the wellness business makes up some 15% of WebMD's revenues.
Big Government's Gift to WebMD
The Department of Health and Human Services will, as part of the Health Care Reform Act, provide some $200 million in grants for the purchase of wellness services. The grants are made available to businesses with fewer than 100 employees who work at least 25 hours per week.
The grants defray 50% of the cost required to implement wellness initiatives. Of course, the grants are slated to expire in 2015, however, we know there is no such thing as a temporary government program. Furthermore, this grant will certainly raise all ships in the wellness industry, and create long-term customers for welness solution providers.
Free Cash Flow
I remain bullish on this industry as a whole. WebMD's advertising model provides consistent free cash flow, but no growth. However, the underlying wellness business will be empowered for years to come by government largess. The nearly $600 million in current assets against a market cap of $1.8 billion provides the liquidity to see this growth story through.
TTM free cash flow generation of $120 million is nothing to scoff at, either.
There's a reason why big names like Carl Icahn and George Soros are after this firm--it generates tremendours FCF, has hidden value in the wellness business, and will benefit from a general lift in health care services as the American population ages. The Federal Government's involvement in health care will only buoy wellness services providers, as the government has a massive financial interest in the wellbeing of its citizenry.
WebMD is like Groupon--it's potential for increasing advertising revenues is limited. However, unlike Groupon, WebMD has a growth story hidden from the public light, which is why I have an open long position in CAPS on WBMD.