I’ve been building a portfolio for high growth stocks that could outperform the market. I stumbled into SelectQuote (SLQT) After doing some due diligence, I like the company’s “story” and believe it is worth a look.
Just a brief background on the company, SelectQuote is a Health, Life, Auto, and Home insurance broker. The company has relationships with all of the nation’s leading insurance providers. What differentiates SelectQuote from traditional insurance brokers is its distribution platform which seamlessly blends technology and agent/human interaction components. The first piece of the puzzle is the company’s website, which allows users to request quotes for insurance premiums inputting their general data. There was already an existing trend of younger people being more comfortable shopping insurance online as it allows a greater level of transparency with regard to pricing and coverage comparison. This trend is only magnified by the ongoing coronavirus pandemic which has forced a lot of people to get used to shopping online.
Supporting this online platform, SelectQuote has a team of able agents who provide a “human touch” to the service. Clients are able to choose whether to go through the process themselves online or have an agent help them out as they walk through the various options. Insurance can get complicated, and some clients need a little bit of hand-holding in order to find a plan that most fits their needs. The final underpinning of SelectQuotes’ business model is its data-enabled lead generation and management. The company engages in direct to consumer marketing and generates leads from a wide variety of sources both online and offline (search engines, TV, 3rd party marketing, etc.). The company’s software is able to estimate the lifetime value of a customer and properly weight it against the customer acquisition costs. As the firm continues to operate, its data set will continue to expand and grow larger.
Medicare Advantage to drive growth
The company’s largest and fastest-growing segment is the senior market for Medicare Advantage (“MA”) and Medicare Supplement (“MS”) plans. Demand for senior insurance products is expected to remain strong in the following years as “Baby Boomers” are set to retire. The portion of the population that is aged 65 or higher is expected to reach 16.9% by 2020. Internet adoption within this group has increased as well due to the coronavirus pandemic. Even prior to the pandemic, 55% of this age group has been making monthly online purchases.
Medicare Advantage plans are becoming more popular in recent years. According to information on the company’s 10-K, at the end of 2019, there were 23 million Medicare Advantage enrollees representing 38% of the Medicare market. By 2025 Medicare Advantage is expected to reach 60-70% penetration. Currently, the company only has a fraction of this market at 300,000 plans sold. The company estimates a $30 billion TAM for this segment alone.
Now I doubt the company will get all of that TAM given that the market for distribution of insurance products is highly competitive with no dominant player. The company competes with agents of the insurance themselves, traditional insurance brokers, and other online platforms. The company has certain competitive advantages over each of these competitor groups.
Buying directly from insurance companies themselves may be a cheaper option however customers won’t get the benefit of having someone help them through the process. Doing price and coverage comparisons on your own can also be a cumbersome process. Traditional insurance brokers are the market that Select Quote (and other firms) hope to disrupt. They rely on networks of agents who do face to face interactions with clients. Some of these firms like Brown & Brown (BRO) are massive with a market cap of $12.8 billion compared to SelectQuotes market cap of $3.4 billion.
There are two other listed online insurance brokers that compete directly with SelectQuote namely Everquote (EVER) and GoHealth (GOCO). I have not done a deep dive specifically on the business models of these companies but other Seeking Alpha authors have written articles on these companies. From my understanding, each company approaches the market a little differently, and Select Quote is the only one that uses an agent and technology mix.
Comparing these 3 services we can see that SelectQuote performs well on the metrics we are looking for when evaluating a high-growth business. Despite being in the business for 35 years, the company only has financial data for the last 3 years. We can see that the company’s revenue has been growing at a CAGR of 52% nearly doubling revenue in 2 years. Note I have adjusted my CAGR calculations to use the TTM data as the last quarters have been fantastic for all 3 firms and each firm had a different fiscal year-end. In terms of short term results, SelectQuote had a 90% year over year growth this last quarter (ended June 2020). The company outperformed its peers as EverQuote had a 40% growth in the latest quarter missing expectations and GoHealth had 70.6% revenue growth.
Author calculation using data from Seeking Alpha
The company also has really healthy 3-year average EBIT margins of 29.3% which is much higher than EverQuote or GoHealth. This was pretty surprising to me considering that SelectQuote has a technology and agent hybrid business model and actually employs roughly 1000 agents. I would have thought that the other two would have better business margins given they are more pure-tech drive. This just shows the effectiveness of SelectQuote’s business model.
I like the company as a growth story that plays into the over-all market theme of e-commerce. However, there are some risks to the firm which are political in nature. As mentioned the fastest-growing segment of the firm is in the Medicare Advantage plans. There has been some talk among the democrats about the completely nationalizing health care in the US. Democratic nominee Joe Biden has already said he does not support “Medicare for All”. However, the risk still remains should Democrats take the house and the presidency. Despite this risk, I am still bullish on the firm over-all. I think SelectQuote is a buy.
Disclosure: I am/we are long SLQT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.