Definitive Healthcare Stock: SaaS Business Intelligence

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It is easy to understand why the market awards a premium to ssoftware-am-asservice (SaaS) Business plans. Typically, these businesses have a large customer base, and no customer accounts for more than a small fraction of the revenue. These are generally high growth companies where the more customers there are, the higher the margins. Most importantly, they provide easy-to-follow steps that anyone can understand, even an MBA.

Aannual rrecurrent revents (ARR) better to increase steadily, the gross retention rate should be in the 90s and the net retention rate should be over 100%. These three metrics alone can tell you a lot about the health of a SaaS business. We love SaaS business models so much that we recently added an indicator to our catalog of technology stocks that indicates whether a company is “pure SaaS”, “some SaaS” or “no SaaS”. Today we are going to talk about a pure SaaS game called Definitive Healthcare (DH).

About Definitive Healthcare Stock

Founded in 2011, Bahstun’s Definitive Healthcare is a $ 3.65 billion company that recently Iinitial ppublic ooffering (Initial Public Offering) in which 15.6 million shares were sold at $ 27 per share. Today, these stocks are trading at around $ 41 per share, which is a + 52% premium. All of this excitement revolves around the “deep healthcare business intelligence” that DH provides to over 2,600 customers through SaaS subscriptions, which represents 99% of total revenue. (No customer represents more than 2% of turnover.The type of business intelligence that Definitive Healthcare sells within the healthcare ecosystem falls into three categories:

  • Third party data: 17 billion claims covering more than 250 million patients in May 2021
  • Manual search: 650,000 research calls and 3.7 million e-mail broadcasts per year.
  • Automated search: Over 20,000 government and regulatory sources, and over 250,000 websites, journals, publications, press articles, job postings

This last point concerns DH’s use of artificial intelligence to automatically extract information from 270,000 different sources, which is impossible to do manually. The company then applies data science to all of that big data to produce additional insights. The healthcare industry functions that are willing to pay for this intelligence include sales, marketing, clinical research and product development, strategy, talent acquisition, and physician network management.

To establish its leadership position in the market, DH has made at least five acquisitions, including the following:

  • Monocle (October 2020) – a Swedish cloud-based platform with millions of expert profiles.
  • HSE (December 2019) – a software analysis company that helps customers find patient groups who would benefit the most from their products and services.
  • HIMSS Analysis (January 2019) – a global healthcare advisor providing guidance and market information solutions.
  • Health data (June 2016) – a provider of data and analysis on U.S. healthcare organizations.
  • American lifeline (Oct 2015) – a provider of real-world data and intelligence for the healthcare supply chain.

During the process of business success, DH took on decent debt – $ 457 million – a number that is slowly increasing over time. If the company was successful in becoming an undisputed industry leader, then maybe all of this leverage was a smart move.

Market leadership and TAM

With an incredibly large dataset and at least five acquisitions, it’s easy to believe that DH isn’t just a top supplier, it’s a clear leader in healthcare business intelligence. Indeed, DH describes the healthcare business intelligence market as weak and “very fragmented”, stating that “no competitor matches our range of data and intelligence solutions.” We then wonder at what point the ttotal aaddressable mMarlet (TAM) is intended for business intelligence in the healthcare sector.

DH describes their TAM as a $ 10 billion opportunity, and their calculations are unusual. They multiply the number of possible customers for each segment by an average ARR which varies as follows:

  • Life sciences – the average ARR of the upper quartile
  • HCIT and healthcare providers – the average ARR of the upper half
  • Other – the average ARR

What they imply is very low penetration with existing customers. It’s there that mand Dsoap rretention (Non-delivery report) becomes an important metric to watch. Is DH really taking more money out of existing customers to capture the large amount of TAM that would be stored with existing customers? As with many SaaS companies, DH omits a critical metric – the raw retention rate – that tells us what percentage of their customers are renewing.

Even though they are overly optimistic and the TAM is only worth $ 5 billion, there is still a lot of benefit to be had given the current ARR of DH which we estimate at $ 153.6 million (using annualized income, as this is not explicitly stated) – about 3% penetration for a $ 5 billion APR or 1.5% for a $ 10 billion APR.

Should You Buy Definitive Healthcare Stocks?

Believe it or not, a lot of people ask Google if they should buy a stock. They better flip a coin. Always invest in a stock based on your own beliefs, because if you buy what someone else tells you, they won’t be there to help you sell it. And selling a stock to capture alpha at the most appropriate time is exceptionally difficult.

That being said, we’re always happy to tell you what we plan to do, which is not to purchase Definitive Healthcare Stock. In order for a stock to find a place in our own portfolio of around 33 tech stocks, it must pass a series of tests. DH ticks a lot of our boxes, we don’t like the stock. This is the same reason we didn’t like another SaaS stock with solid metrics – Procore. The two companies are not independent from the industry, which means that an industry-specific downturn could wreak havoc on them. Compare that to other SaaS companies like DocuSign or Splunk who sell their solutions to all industries.

A counter argument to make is that the healthcare industry is resilient to recessions because we will always have sick people. Fair enough, but healthcare executives behave like all other executives. If there is an economic downturn, they are looking to cut costs. We don’t want to invest in nice subscription offers, we want solutions that are also in demand in any economic climate – they either provide a critically important function (i.e. Databricks) or they save businesses money (i.e. Health catalyst). We don’t believe that Business Intelligence is a big enough offering to capture TAM – especially from existing customers – when the purse strings tighten.

Conclusion

We have added a note to our own investment methodology that emphasizes the importance for a SaaS company to be industry independent. As risk averse investors, we are always looking for ways to reduce risk. You wouldn’t want your portfolio to be dedicated to a narrow industry niche and the same is true of stocks.

Definitive Healthcare is pure healthcare SaaS game with sound metrics and lots of potential growth to come. We love the stock, but that’s as far as we’re willing to go. Definitive Healthcare – we really, really love you as a person, but we better just stay friends.

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