WW International Stock Is A Buy Following Sequence Deal
WW International (NASDAQ:WW) announced that it would acquire digital health company Sequence for a net consideration of about $106 million, as it looks to enter the increasingly popular obesity drug market. Sequence offers a subscription service for telehealth consultation with doctors who can prescribe appetite-suppressing drugs such as Wegovy and Ozempic. While WW has traditionally helped its clients lose weight through a system that focuses on diet and lifestyle changes, this space has faced considerable competition from a wave of new-age applications as well as social media influencers. For instance, for Q4 2022, the company saw revenue decline by 19% year-over-year to $224 million, with its digital subscribers base falling by 17.6% to 2.8 million. With the deal for Sequence, WW can now offer customers a medical approach toward weight loss, entering one of the hottest sectors of the drug market. These drugs effectively act like a natural hormone that slows the emptying of the stomach and makes users feel fuller for longer, helping with weight loss. Although Sequence is only an emerging player in the space, with about 24,000 members as of last month and annual run-rate revenues standing at about $25 million, WW has the potential to upsell Sequence services to its existing base of roughly 3.5 million weight loss program subscribers.
WW stock was up by about 50% over the last five trading days, trading at about $5.50 per share as of Wednesday, as investors appear optimistic about the new deal. So is the stock still a good value following the recent gains? There are some risks that we see for WW. The company is still highly leveraged with long-term debt standing at over $1.4 billion, compared to its market cap of under $400 million presently. This is a concern in a rising interest rate environment. However, the company has also been fairly consistently generating free cash flows despite its declining growth and subscriber losses. There might be scope for improvement in cash flows going forward, given the Sequence deal and also the company’s move to undertake several cost-cutting measures. The risk-to-reward trade-off for WW appears more palatable, with the stock trading just about 0.4x forward revenue, a fraction of the 2.5x forward revenue value it traded at in mid-2021. We have a $9 per share price estimate for WW International stock, which is over 60% ahead of the current market price. See our analysis WW International Valuation: Expensive or Cheap for more details on WW’s valuation and comparison with peers. Check out our analysis on WW International Revenue: How does WW Make Money for an overview of WW’s business model, key revenue streams, and how they have been trending.
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