AI Integration And ICHRA Enrollment Will Improve Efficiency And Long-Term Success

Key Takeaways

• Strategic pricing, product innovation, and AI integration drive market share gains, enhance efficiency, and contribute to strong revenue growth and profitability.
  
• Expansion into new markets and diverse membership growth bolster long-term sustainability and revenue prospects.
  
• Reliance on future assumptions, payment integrity issues, and regulatory changes pose revenue and profitability risks amidst execution and market challenges.

Catalysts

Operates as a healthcare technology company in the United States.

• Oscar Health is expected to drive a significant year-over-year increase in operating margin through continued administrative cost efficiencies and improved medical loss ratio (MLR) performance. This would positively impact net margins and earnings.
  
• The company aims to maintain at least a 20% compound annual revenue growth rate (CAGR) and achieve a 5% operating margin by 2027, indicating strong revenue growth and margin expansion potential.
  
• Oscar's strategic pricing and product innovation have led to strong market share gains and above-market growth, which are anticipated to continue, positively affecting future revenue and earnings.
  
• The integration of AI into operational processes is expected to enhance efficiency, reduce costs, and improve service delivery, directly contributing to improved net margins and profitability.
  
• The expansion into new markets, strong enrollment growth, particularly in Individual Coverage Health Reimbursement Arrangements (ICHRA), and attracting a diverse membership base are projected to bolster revenue and drive sustainable long-term growth.

Oscar Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Oscar Health's revenue will grow by 13.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 4.2% in 3 years time.
• Analysts expect earnings to reach $564.5 million (and earnings per share of $1.75) by about March 2028, up from $25.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $710.7 million in earnings, and the most bearish expecting $379.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 152.8x today. This future PE is lower than the current PE for the US Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to grow by 5.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Oscar Health Future Earnings Per Share Growth

Risks

• The company's reliance on assumptions for future estimates may pose risks, as unexpected changes in factors like membership or market conditions could negatively impact future revenue and earnings.
  
• Concerns about payment integrity and potential above-average lapses or payment rates could result in lower enrollment numbers, affecting revenue growth.
  
• The increase in medical loss ratio (MLR) due to higher risk transfer payables and market risk score adjustments could pressure net margins and profitability.
  
• There is execution risk related to the company's growth strategy, especially in maintaining high retention rates and managing risks related to SEP (Special Enrollment Period) lives, which could impact revenue stability.
  
• The evolving healthcare regulatory environment and potential shifts in subsidy structures or verification processes could introduce uncertainties to revenue and earnings forecasts.

Valuation

• The analysts have a consensus price target of $19.929 for Oscar Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $28.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.5 billion, earnings will come to $564.5 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $15.53, the analyst price target of $19.93 is 22.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.