Agilon Health (Symbol: AGL) surged following its Initial Public Offering (IPO) in April 2021, up a staggering 90% in just the first two months of trading. Unfortunately for IPO investors, the journey proved to be a round-trip ride, with the stock now right back to where it started at its IPO price of $23 per share.
So, what happened? Did Agilon fail to live up to its pre-IPO expectations?
What Does Agilon Do?
First, some background on Agilon is needed. Agilon partners with primary care physician groups across the country to offer “value-based” care to their Medicare Advantage patients (those over the age of 65).
Historically, medical providers were paid on a per-procedure, or per-service basis (i.e. routine check-up costs X, dialysis treatment costs Y).
Agilon has essentially turned this traditional health care model on its head. Rather than insurance companies paying per-procedure, Agilon negotiates with insurance companies to receive a single annual payment per patient that covers everything. Agilon (and its physician partners, which share in the profits) are then highly incentivized to invest in preventative care, so that fewer procedures are needed down the line. Fewer procedures will mean lower costs for Agilon, and thus, greater profits.
In essence, value-based care shifts the focus of its partner physicians from the quantity of procedures performed, to the quality of care they provide.
Despite its recent stock performance, Agilon still looks just as promising as the day of its IPO. Consider these management forecasts for this year from the firm’s recent Investor Day:
- Revenue growth of 39%
- Membership up 46%
- Positive “adjusted” EBITDA for first time
In addition, nothing has changed to the firm’s longer-term attractiveness:
- Agilon benefits from a recurring subscription-based model, whereas it collects a per-patient fee from insurance companies every year. This makes its revenue very predictable year to year.
- Patient relationships with their primary care physician also tend to be very sticky (90%+ retention), so Agilon should see very low patient turnover.
- Demographics strongly favor Agilon’s business model, as the over-65 (Medicare Advantage) population continues to grow larger.
- Agilon has a natural runway to growth as it adds new physician partners in new geographies.
The Post-Covid IPO Boom
If company fundamentals aren’t driving the stock lower, then what is?
Simply put, the market’s overall risk appetite has changed drastically since Agilon went public, with the market now reassessing how it values recent IPOs.
The Federal Reserve’s response to the immediate onslaught of COVID in early 2020 was to flood the economy with liquidity. Arguably, The Fed’s actions helped stave off a depression and helped the economy enjoy one the of briefest recessions on record.
In addition, the Fed’s actions caused one of the greatest stock market rallies in history.
During periods of great exuberance in the stock market, the riskiest stocks (companies that are long on promise, but short on profits) typically do the best, as was the case in 2020 and the early part of 2021.
The prime beneficiary of that exuberance: IPOs.
The chart below shows the post-COVID performance of IPO stocks (measured by the Renaissance IPO ETF), which tend to be unprofitable and more risky, versus dividend-paying stocks (measured by the Vanguard Dividend Appreciation ETF), which tend to be highly profitable and less risky. From March 2020 to the time of Agilon’s IPO in April 2021, IPO stocks beat dividend-paying stocks 177% to 65%.
As you can see from the chart, Agilon went public at a time when IPO stocks were in very high demand. Like selling your house in a hot housing market, Agilon debuted at the top of the market.
The next chart shows what’s happened since. From the time of Agilon’s IPO in April 2021 through March 2022, IPO stocks are down 31%, while dividend stocks are actually up 6%. Agilon, for what it’s worth, has outperformed other IPOs, down only 14%.
What can Agilon Investors take away from the performance of the overall IPO market?
With IPO stocks now being shunned by investors, Agilon may not return to its prior high for many years (no matter how well the company performs).
In other words, Agilon may be “dead money” for a lot longer than you think.