My stock has fallen, and it can’t get up: LifeMD $LFMD, Medifast $MED

Guest Idea Series

I have to sometimes remind myself that inside jokes and memes from thirty years ago might fall flat to a different generation or an international audience. Allow me to introduce you to Mrs. Fletcher, the star of an iconic television commercial from the 1980s.

LifeMD (LFMD) is a guest idea from another member of the substack community,

1035 Capital Management

.  This is a growth stock, and I am by nature a value investor, so this is pretty far outside of my comfort zone.  If there were a sector that I could wish to become competent in, however, I would ask a genie to grant me competence in biotech.  Biotech is the only sector to outperform tech for the last 40 years, and we are confronted with a baby boomer generation with over $75 trillion in assets and a relatively strong emphasis on spending the money on themselves.  In the words of Elizabeth I, “All my possessions for a moment of time.”  I think it’s a pretty strong tailwind to own the companies who are trying to sell that moment to them.

There are two things I don’t like about growth stocks as compared to value stocks.  The first is that with value stocks, you have to worry about obsolescence, but you generally don’t have to worry if the entrepreneur can carve out their niche and create their market.  A solid chunk of value investing is just finding businesses which are cyclical, but a significant part of the market believes is in structural decline, such as platinum group metals for catalytic converters.  The second thing I don’t like about growth stocks is the constant dilution.  In order to grow the business from idea to maturity, there are many rounds of returning to the capital markets to raise equity capital.  Even if you are right about the thesis, and you are right about the business, if you invest too early in the dilution process, you can still do terribly.  

LifeMD is a telehealth company in a crowded field, but the management team has aligned incentives and they are demonstrating good growth at the moment.  Network goods tend to be a winner take most marketplace, and LifeMD has $163 million trailing twelve month revenue compared to Teledoc’s $2.6 billion.  Unlike Uber, however, where the dominant network has more available taxi’s nearby, for telemedicine, a doctor anywhere in the country can satisfy a client’s needs.  So this doesn’t appear to be so fatal to not be the market leader as in other areas of tech.  Compared to Teledoc, it appears to me that LifeMD is focusing on niche and perhaps bespoke markets, such as RexMD, a men’s only telemedicine platform, where our fellow kings can have a men’s only environment to discreetly acquire their erectile dysfunction prescriptions.

Do you remember what was the big trend before Artificial Intelligence sucked all the oxygen out of the room?  It was the GLP-1 revolution with Ozempic, Wegovy, and Mounjaro.  So far, the FDA has approved Wegovy for heart disease patients, and LifeMD has been trying to position itself to be at the forefront of telemedicine for GLP-1 prescriptions.  LifeMD is also projecting to be able to take government medicare dollars either in Q4 2024 or Q1 2025. LFMD just recently signed a strategic partnership with Medifast (MED), a weight loss focused company with 40,000 weight loss coaches nationwide.  MED paid LFMD a $10 million fee, and a $10 million equity investment in order to partner with LFMD so that MED’s weight loss coaches can offer quick access to a doctor to prescribe GLP-1’s as a part of the total weight loss program.  MED has also promised to spend $25 million in advertising in 2024 to promote this new service.  So far LFMD has 50,000 weight loss patients in their portal, which is a significant part of their 235,000 total clients at the moment.  This is the good kind of strategic dilution that can lead to amazing growth. 

LFMD also has a hidden asset, through an early stage investment before the entrepreneurs had decided on telehealth, they became a 73% owner of WorkSimpli, a SAAS company with about $90 million in projected 2024 revenue and currently growing at 20%.  Even down from the 2021 peak, SAAS companies at that growth rate are currently valued at over 5x revenue, putting the 2024 value of WorkSimpli around the $450 million range with LFMD as a 73% owner with stated intent to monetize this asset eventually.  

Let’s look at some of the numbers for LFMD:

Revenue

EBITDA

Shares Outstanding

Again, I’m not a growth investor, but if I were, LFMD has everything to be a pretty good place to enter an investment.  The revenue is accelerating, the EBITDA is projected by management to be positive by Q3 or Q4 this year, and the dilution may be somewhat decelerating if you squint your eyes.  There is the strategic dilution that comes with a $10 million fee, 40,000 new salespeople, and a $25 million marketing campaign.  Telehealth revenue is projected to grow at 43% in 2024, and over the last twelve months total revenue has grown at 25% but share count has only grown at 20%.

As in most tech startups, executive compensation is enormous, but unlike most tech startups, the executive team is putting their money where their mouth is and buying stock.  Not only did they buy when prices were low, but they bought when prices were lofty in 2021.  Incentives are aligned, and the management team believes in the business.

So thank you to 1035 Capital LLC for turning me on to LFMD, it is a solid idea and I am very impressed.  Putting a price target on a small cap growth stock is a fool’s errand, but management is projecting $20 million profits in 2025 from their core business, and giving it two or three years to grow, minus dilution and executive compensation, plus $350 million for WorkSimpli, LifeMD could easily be a $1 billion to $1.5 billion market capitalization company by 2027, about a 5x or more from here.

My deep value bones have me looking harder at MED though, the market thinks GLP-1s are going to crush them, and the stock is priced for death, meanwhile it trades at a price to earnings of 2, and they are going to be coaches giving clients access to and helping clients to use GLP-1s as a part of a total health strategy.  Heck, at these prices, Teledoc (TDOC) doesn’t look bad either with its free cash flow of $200 million in the last twelve months and their market leadership position.  I suspect that due to sector rotation, healthcare is about to get some huge inflows as big tech deflates and looks for a new home.  

Let me know in the comments if you want Medifast (MED) as a separate writeup in the Probably Not a Value Trap category.