CALL DETAILS
Date and Time: Thursday March 9th at 10AM ET
CLICK HERE for event details (includes video and materials link)
Lifestance Earnings Call: LFST reports 4Q22 Earnings Wednesday March 8th with the earnings call at 8:30AM. CLICK HERE
Background | Addicted To growth
Lifestance IPO'd June , 2021. Our initial positive view on Lifestance was focused on the company as a way to be long the strong secular tailwinds of behavioral health and had LFST as an Best Idea Long. As our work progressed, particularly as we interviewed former therapists and acquired practice owners, we began to understand the significant depths of the operational problems embedded in their business.
The company was rapidly acquiring practices to hit growth targets, but through poor employee relations and operations missteps, Lifestance was losing large numbers of therapists. The company was not disclosing the issue or providing detail on the percentage of headcount growth that was organic versus what was acquired. The cost of hiring across Health Care rose rapidly as the post pandemic recovery was converting to widespread labor scarcity and wage inflation, especially for mental health professionals. And our tracker was showing the high turnover, so we moved it to a short.
Thesis | Turnaround tailwinds
We believe LFST is currently at an inflection point where several industry and operational headwinds are poised to turn positive. Key among these positives is new leadership committed to fix the operational problems we heard so much about from former employees. The secular tailwinds for the demand for mental health services have accelerated over the last 3 years, and so to has the labor market for mental health professionals. Labor scarcity and wage inflations has been has limited Lifestance's ability to grow, but there are signs those constraints are easing.
We also believe the Quad 4 economic back drop is a net tailwind on a number of fronts for Lifestance. A weaker economy should lead to an uptick in demand overall where economic stress drives the demand for mental health services, but we also expect patients will shift toward more affordable providers like LFST that take health insurance, which is the minority of all available therapists. For patients seeing the 40-80% of therapists who do not take insurance hourly rates can range from $100-$200 compared to the copay and deductible on a fully insured rate of $90. A shift in patient demand is also likely to result better hiring and retention for Lifestance as the risks of a solo practice become more pronounced.
WANTED: INDUSTRY VETERAN WITH PAYOR EXPERIENCE
A big catalyst for our change in view has been the naming of Ken Burdick as CEO of Lifestance September 2022. Having held the CEO role at Wellcare, United Healthcare, Centene and other leadership positions across the Industry, especially in the payor space, we think Lifestance's issues are likely to come under control. You can see his LinkedIn profile here > https://www.linkedin.com/in/kenneth-burdick-21749412/.
Ken Burdick in his first quarter as CEO guided 4Q22 lower than consensus, which assumes a massive drop in throughput per therapist. It may be conservative, or it may mean that there are layers to the turnaround that will take time. Since his arrival, we have been noting the improvement in hiring retention we've seen in our Lifestance Tracker and which shows a big sequential increase in net hires. To hit the revenue guidance we have to assume a massive drop in therapist throughput. Either way, we think 4Q22 will be the bottom, but we'd like to see the river card tomorrow and host our call the day after.
Valuation | a double or triple from here
Lifestance price correlates highest with consensus EBITDA (83%) followed closely by consensus revenue (78%). Assuming the pace of organic growth in therapists, and the tailwinds to patient volume play out, we can anticipate both estimate trends to accelerate, taking the shares with it. Running the model out to 10,000 to 15,000 therapists from the current level 5,400 (we think 6,000 was reached in 4Q22) at the end of 3Q22 (a small fraction of the total population), a recovery in gross margins as operational improvements take hold, we think LFST should range between $10 and $20, or 100% to 400% higher from here.
