Health care is a service that will always have demand, and that demand is set to increase massively in the years ahead as populations age. As health care integrates more and more with technology and the interconnected universe of the internet, the companies at the nexus of that connection will be set to benefit.
Care.com Inc. (CRCM, Financial), an online health care marketplace backed by Alphabet Inc.'s (GOOG, Financial)(GOOGL, Financial) Google,Ă‚ specializes in family care, providing solutions and support to millions of users. The company connects 15 million families to 11 million caregivers across dozens of countries.
Let’s see if Care.com can live up to the hype.
The opportunity
Care.com’s stock price sits around $19, a big jump from $10 when Google invested last year. Revenue shows encouraging signs, increasing every quarter since that investment. The company's revenue since last year has increased consistently from $111 million to $139 million to $162 million. 2017 is expected to reach a new high as well.
While Care.com’s per-share earnings are nothing to write home about as of yet in absolute terms, it has consistently outperformed expectations, with third-quarter EPS bringing in a 400% surprise. This is an encouraging sign for future earnings performance.
Net income growth also shows encouraging signs. 2016 was Care.com’s first year of positive net income, posting $1.63 million. That is a marked improvement from 2015, when the company posted a net loss of $15.5 million (not to mention a $34 million net loss in 2014). Given its past three quarters’ performance, Care.com should be able to double 2016’s net income.
Despite the speed of its growth, absolute earnings remain low. Continued growth and expansion are the only way to keep the story moving in such a positive direction. The repeated mantra among Care.com’s management is the need to build the user base. With more than 25 million registered users, there is still plenty of room to expand.
It is encouraging that hundreds of billions of dollars are spent every year in the United States on services related to care, including in-home and day care. This market is a giant opportunity, and Care.com looks to capitalize on it with its online platform and modern offerings, not to mention the strength and pull of its backing by Google.
The Google factor
Google’s vote of confidence has done a lot for Care.com already. In June 2016, Google’s private equity arm, Google Capital, made an investment of $46.2 million in Care.com, taking an approximately 17% stake in the company, making it the largest shareholder. The move has undoubtedly instilled some confidence in the market thanks to Google’s reputation and industry clout.
Google claims to see Care.com as part of a long-term investment strategy. Interestingly, the company has been using Care.com’s services for its employees for years. Clearly it valued what it was buying since it decided to take some control of the business and its offerings. Care.com has seen soaring sales, growth and profits in the time since Google’s sizeable investment. The stock price has likewise risen substantially.
What does Google’s investment mean? Beyond the encouragement it gives the market to be bullish on Care.com, Google’s position in the marketplace and general online community could give Care.com several advantages. No one ever said it hurt to have the backing of the largest, most powerful player in the game. Tapping into Google’s mastery of networked services, the company should be able to tap new sources of customers and perhaps integrate new levels of service it could never hope to achieve on its own.
The problems
No investment story is complete without consideration of the potential downsides. Care.com has a few worth looking into.
The first is the issue of competition. As with every massive market opportunity, Care.com is going to face stiff competition. Care-related companies abound, including a wide variety of startups attacking various parts of the online and networked care market. New technology and disruptive innovation could upset Care.com from its perch. That said, the company has done a very solid job of positioning itself thus far, but it will be a game of perpetual vigilance.
Lagging profitability may also begin to wear on Care.com as a company and as a growth stock. Investors will forgive a growth story for a long time, but if they begin to lose sight of the profit at the end of the tunnel, things can get ugly. And while Care.com’s profits are very low compared to its $600 million market capitalization, the very fact it does generate net returns is something to impress in a world of fast-growth, no-profit tech networks.
Verdict
Care.com is seeing strong revenue growth. It not only continues to grow revenue and its user base, but also limits the costs of that revenue. Otherwise, gross profit will fail to exceed the fairly anemic numbers at which they currently stand.
For investors confident in the ability of Care.com to continue its rapid growth trajectory for the foreseeable future, then the price is still a bargain. For serious value investors, this may be a bit too dear a buy.
Disclosure: I/We own none of the stocks mentioned in this article.
