Healthcare Services And Medicare Will Boost Future Momentum Amid Risks

Key Takeaways

• Expansion in healthcare services and technology investments boost revenue growth, margin expansion, and operational efficiency, driving higher profitability and improved cash flow.
  
• Growing Medicare market and diversified revenue streams enhance long-term stability, reducing earnings volatility and strengthening the company's financial position.
  
• Slowing growth, reliance on cost cuts, market volatility, and persistent balance sheet risks challenge SelectQuote's ability to sustain margins and long-term earnings expansion.

Catalysts

Operates a technology-enabled, direct-to-consumer distribution and engagement platform that sells insurance policies and healthcare services in the United States.

• Rapid growth of the Healthcare Services business, especially SelectRx, demonstrates strong product-market fit with recurring, high-margin revenue and significant runway for further margin expansion as scale efficiencies kick in; this positions the company for sustained revenue and EBITDA growth.
  
• Increasing adoption of digital platforms for insurance and healthcare services, combined with SelectQuote's advanced technology and AI investments, continues to reduce customer acquisition costs and drive agent productivity, supporting higher operating margins and improved EBITDA.
  
• The aging U.S. population and rising Medicare enrollment ensure a steadily expanding addressable market, enabling long-term top line growth opportunities across both the Medicare insurance and pharmacy segments.
  
• Enhancement of operational efficiency through automation and process optimization, evidenced by rising agent productivity and improved revenue-to-CAC ratios, sets the stage for higher profitability and stronger operating cash flows in future years.
  
• The company's transition toward a diversified platform with a balanced mix of immediate cash-generating healthcare revenues and more stable, recurring senior insurance cash flows reduces earnings volatility and supports improved free cash flow and balance sheet strength over time.

SelectQuote Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SelectQuote's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.6% today to 1.3% in 3 years time.
• Analysts expect earnings to reach $25.7 million (and earnings per share of $0.02) by about August 2028, up from $25.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.0x on those 2028 earnings, up from 17.3x today. This future PE is greater than the current PE for the US Insurance industry at 14.7x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

SelectQuote Future Earnings Per Share Growth

Risks

• SelectQuote's Healthcare Services (SelectRx) is experiencing slowing membership and revenue growth rates as the business matures, suggesting diminishing expansion opportunities which could limit long-term revenue growth and EBITDA margin improvement.
  
• The company anticipates relatively flat Senior policy volumes and expects agent productivity to revert to historical norms, which may constrain future revenue growth and compress margins due to a less favorable business mix.
  
• Margin expansion is heavily dependent on further cost optimization and automation; if technology investments or efficiencies do not adequately offset rising costs or competitive pressures, net margins and profitability targets may not be realized.
  
• Persistent volatility and disruption in the Medicare Advantage market, including plan terminations and carrier profitability actions, expose SelectQuote to policy volume declines and lower Lifetime Value (LTV) per policy, risking the stability of earnings and cash flow.
  
• Despite recent improvements, the company's focus on improving its balance sheet and cost of capital indicates ongoing leverage and capitalization risks; a failure to further optimize the capital structure could elevate financing costs and impede reinvestment in technology or new business lines, hindering long-term earnings growth.

Valuation

• The analysts have a consensus price target of $5.25 for SelectQuote 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 $7.0, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $25.7 million, and it would be trading on a PE ratio of 45.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $2.51, the analyst price target of $5.25 is 52.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.