Shares in healthcare IT company Orion Health Group Ltd (ASX: OHE) have been given a hammering since the company's half year results announcement on Monday.
Shares are down 32% since the company announced a 2% increase in operating revenue and a significant improvement in the operating loss.
Clearly, the market was not impressed.
Orion Health's software connects the many different parties involved in the healthcare system and streamlines the flow of patient information. Shares are relatively thinly traded on the ASX, but the fact that the company can be bought today for one third of its listing price, while revenues have grown around 30% makes a fantastic argument for closer inspection.
The company appears confident it can roll out a profit for the 2018 financial year, but there are three key risks troubling investors:
1. Cash uncertainty
Orion has been crystal clear on its intention to use cash raised from its IPO to fund a growth strategy requiring significant investment in R&D; burning cash, but creating long-term value for investors.
Any growth didn't show up in reported revenue for the first half of FY17 as it was driven down by the appreciating NZ dollar. When combined with the significant decrease in operating cash flow (due in part to differences in payment timings) investors scarpered, concerned the company has little margin of safety in cash if growth doesn't eventuate.
New Zealand investors are especially fearful after the recent failures of listed tech company Wynyard Group Ltd (NZE: WYN) and clothing retailer Pumpkin Patch Limited.
2. Trump uncertainty
When your cash chugging investment strategy relies heavily on growth actually materialising the word "uncertainty" is not what investors want to hear. Orion went there though, noting in its half year update that "we are operating in a period of some uncertainty in the U.S." due to the change in government.
The company went on to reaffirm"we have seen no evidence of any deferral thus far", but the damage was done.
The U.S. spends a ridiculous 17% of annual GDP on healthcare each year and represents a crucial opportunity for Orion Health.
3. Valuation uncertainty
But what investors despise above all else is the huge challenge in valuing a company with no positive earnings, lumpy cash flows, immediate expensing of R&D costs and indecipherable margins. It ain't easy.
Just take a look at this crude comparison to software company Pro Medicus Limited (ASX: PME) which facilitates radiology imaging and produces positive cash flows and an impressive profit margin:
Pro Medicus' revenues are a fraction of Orion's, but each dollar Pro Medicus earns in revenue has upside and a clear value to investors. Orion doesn't have this luxury, increasing the risk of valuation and commanding almost half the market value.
Foolish takeaway
All these factors have investors abandoning Orion Health like a sinking ship, largely out of fear, to the point where the company could be a true bargain.
Orion expects growth to accelerate in the second half of the year and my personal view is that at the company has a high probability of navigating its cash situation without the need to raise additional capital.
If that is the case, I think the potential upside to Orion Health markedly outweighs the risks.
