What a brutal six months it’s been for LifeStance Health Group. The stock has dropped 21.2% and now trades at $5.40, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in LifeStance Health Group, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is LifeStance Health Group Not Exciting?
Even with the cheaper entry price, we're cautious about LifeStance Health Group. Here are three reasons there are better opportunities than LFST and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $1.32 billion in revenue over the past 12 months, LifeStance Health Group is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
LifeStance Health Group broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
LifeStance Health Group’s five-year average ROIC was negative 9.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
Final Judgment
LifeStance Health Group’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 31.9× forward P/E (or $5.40 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of LifeStance Health Group
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