DRIO | Real A.I., Real Pipeline, Real Path Back to $30+

Dario Health reported 1Q21 results that were good enough to maintain the long for this $237M market cap name. Like many stocks in the Health Care Sector, shares have been cut in half since peaking at $30 in mid- February, although 4Q21 earnings didn't help.  1Q21 was better, in our view, and at a minimum a significant improvement in communication.  We think shares will double from here by year end as evidence builds that the new sales effort is succeeding in penetrating their self reported $700M pipeline with a path to $100 if the market starts pricing in 20% penetration.   2021 consensus revenue is consistent with management hitting their goal of closing a few new contracts in 2021 primarily among health plans and providers.  According to management, some payor contracts are currently "out for signing."  Deal announcements, even small successes in the short term, will only boost  2021 enrollment and revenue modestly.  However, the real inflection will be announcements of employer deals that impact 2022 that will emerge alongside the 2021 cohort.  

1Q21 RECAP

There were a couple of items on the quarter we liked, and others we were less enthusiastic about.  The acquisition of the behavioral health company, WayForward, looks like a low cost, high return decision.  The two companies were already pitching together in an integrated sales effort.  WayForward is not positioned as a staffed therapy provider like most behavioral health offerings, but as a referral engine, a strategy we think gets traction in the post-pandemic environment.  Also, Upright is now being positioned as a peer to Hinge ($3B private company) and other gyroscope-based remote PT services, rather than only as a self-directed posture correction tool.  

The negatives were the lack of deal announcements which was disappointing after their commentary during the 4Q20 call.  Management continues to expect to close 20-30 deals over the remainder of 2021 primarily among health plans.  Employer contracts remain the key to the stock and deals announced in 2H21 are likely to have a January 1, 2022 start date.   We are also less enthusiastic about efforts to sell remote patient monitoring (RPM) to provider groups, which seem like a smaller opportunity with longer sales cycle and smaller revenue per client.    

ISN'T IT JUST TELADOC, ONLY SMALLER?

In the mid- teens, shares trade at 5x EV/Sales against 2022 consensus of $44M.  As the company announces contract wins over the coming 6 to 10 months, consensus estimates of $44M will look low, significantly in our view.  We think $50M-$60M appears within reason, and longer term, if they are successful in 2021, $100M is reachable.  We don't need DRIO to be the next Teladoc.  We only need them to be somewhat successful in 2021, which will will make their $700M pipeline look real, their A.I. look real, their executive talent and strategy look real, and the long term revenue opportunity look much larger.   

On the A.I. front, we recently participated in a presentation by Dr. Omar Manejwala, Dario's Chief Medical Officer, on Dario's A.I. engine and hope to have him in the studio soon for a live Q&A.  We think it will be a good opportunity to hear about market trends and demands post pandemic and how their A.I. engine competes against Teladoc and others.