Today, Thorne HealthTech (NASDAQ: THRN) is trading below its initial public offering price. Considering the dynamics of financial indicators and the potential for growth, the company looks very cheap. The size and potential of the market provide the company with enormous room for growth. THRN is experiencing double digit growth and improving profitability. Despite the aggressive growth stage, the company is already generating free cash flow and a bottom line. According to our conservative valuation model, Thorne trades at a significant discount to its fair value. We rate stocks as a to buy.
Thorne HealthTech, Inc. offers various health tests, such as stress, sleep, weight management, heavy metals, biological age, gut health and other health tests for its customers, as well as developing nutritional supplements. Through the Onegevity platform, the company provides personalized information and data on the biological status of its customers and offers condition-based products to improve their health. The company operates in the B2C and B2B segments. The company makes about 13% of its revenue through a subscription model. The revenue structure is shown below:
In September, Thorne sold 9 million common shares at a median price of $ 14 on the IPO. The company received approximately $ 126 million. THRN used $ 20 million to pay off all outstanding debts under the credit and guarantee agreement with Sumitomo Mitsui Banking Corporation. The rest of the money was used to develop the business.
Huge addressable market and good customer loyalty
In his last investor presentation, the company presented the valuation and dynamics of its addressable market based on the research of MarketsandMarkets, Bcc search, and Facts and Factors. The company’s TAM is estimated at $ 350 billion and is expected to grow at a CAGR of 9% over the next five years. The size and potential of the market provide the company with enormous room for growth.
Many consumers are skeptical of nutritional supplements. Indeed, the effectiveness of many of them can be questioned. THRN, on the other hand, works at the interface with medicine. Healthcare professionals, hospitals and athletes choose Thorne products. The company’s clients include names such as Unilever (NYSE: UL), Tetra Bio-Pharma (TSX: TBP), Kyowa, Ultimate Fighting Championship, NBA, and a Mayo Clinic University Medical Center. The retention rates of Healthcare Professionals are high and growing:
While most of the revenue (60%) the company derives from B2B contracts, individuals also love THRN products. On Amazon, the customer Evaluation for nutritional supplements is 4.6 to 4.8. In the last in very good health evaluation, the company’s products have been recognized as the best for hormone control and the best for accuracy. The DTC segment also has good customer loyalty, with the share of subscription sales increasing from 29% to 31.5% in 9M 2020 and 2021, respectively. With its strong market positioning, we expect Thorne to benefit from a growing market.
According to the 9-month 2021 results, THRN’s revenue increased 32.4% year-on-year to $ 135.4 million. At the same time, the gross margin increased by 7 percentage points and reached 53%. Despite the aggressive growth stage, Thorne is already a profitable business.
Despite the 3pp YoY drop in operating margin (due to abandonment of assets and loss of stake in unconsolidated subsidiaries), the company can easily meet its profitability target through its marketing efficiency . As a percentage of revenue, marketing spend is currently 15%, but THRN can easily reduce this expense since the customer’s lifetime value is 7.6 more than the customer’s acquisition cost.
If marketing effectiveness and costs as a percentage of revenue remain the same in the coming years, revenue will increase exponentially. This scenario is very likely because the indicator is rising and the market potential is huge.
Our model is conservative. Although management’s long-term revenue growth target is 30%, we expect the growth rate to slow down as early as 2022. Our profitability assumptions are roughly in line with current indicators and do not consider as the business becomes more profitable due to economies of scale. The terminal growth rate is 4%. Our assumptions are presented below:
With a cost of equity equal to 10%, the weighted average cost of capital [WACC] is 9.2%.
With an EV / EBITDA terminal equal to 10.55x, the fair value of the company is $ 739 million or $ 14 per share. Thus, the company trades at a significant discount to its fair market value. The business is also inexpensive in terms of multiples. Despite double-digit revenue growth, THRN’s EV / Sales is 1.75x. Price / earnings / growth ratio [PEG] 0.15x.
The market oversold Thorne’s shares. The company is experiencing double-digit growth. It has a strong positioning and enormous market potential. Despite its aggressive growth, THRN is already a profitable business. We expect the business to continue to grow and improve profitability. Thorne trades at a significant discount to its fair value. We are very optimistic.