Over the past six months, LifeStance Health Group has been a great trade, beating the S&P 500 by 13%. Its stock price has climbed to $7.80, representing a healthy 26.2% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy LifeStance Health Group, or should you be careful about including it in 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?
We’re glad investors have benefited from the price increase, but we're cautious about LifeStance Health Group. Here are three reasons you should be careful with 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 $1.49 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
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
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? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
LifeStance Health Group’s five-year average ROIC was negative 7.8%, 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. With its shares topping the market in recent months, the stock trades at 22.9× forward P/E (or $7.80 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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