Progyny, Inc. is a promising investment consideration based on a positive long-term growth outlook. Despite a revenue miss in 1Q24, this is not seen as indicative of a structural impairment to growth.
Historical U.S. Assisted Reproductive Technology (ART) cycles suggest a solid long-term growth trend, with downturns typically followed by strong rebounds. Leading indicators suggest that utilization rates are already back on track.
Review of Latest Results
Progyny reported Q1 earnings in early May, with revenue growth of 7.6% to $278 million, missing the street expectation of $290 million. Fertility benefit services saw growth of 8.1% to $169.8 million, while pharmacy services grew by 6.9% to $108.3 million.
Gross margin declined by 18 basis points to 25.7%, while EBITDA margin expanded by 14 basis points to 18.1%, amounting to $50.3 million. Despite disappointing results, the revenue miss is viewed as a one-off issue rather than a structural problem, and the stock has dropped from approximately $32 to $26.
Understanding the Revenue Miss
The revenue miss was not due to structural issues. Utilization rates in January and February were in line with 2023, but saw a sharp decline in mid-March. This decline is attributed to patients adjusting expectations around access to maternal healthcare following the Alabama Supreme Court ruling, particularly in states with restrictive reproductive laws.
Utilization rates are believed to be delayed rather than permanently impaired. Recent legislative clarity is expected to improve the situation, and management has noted that utilization rates stabilized and improved in April.
Importantly, while utilization fell in states with restrictive laws, there was no decline in demand for PGNY’s fertility benefits among employers in those regions. This indicates that employees can continue to access affordable IVF, suggesting potential future demand and utilization.
Future Growth Expectations
Progyny is expected to see growth reaccelerate in the coming quarters, with several indicators suggesting solid demand. The year-to-date pipeline remains strong, with early commitments indicating increased adoption. The percentage of large employers offering IVF coverage has increased significantly, from 23% in 2019 to 45% in 2023. Engagement levels have also persisted above 2022 levels, indicating that the current increase in adoption and growth in the pipeline is not a one-off event.
IVF demand has historically been resilient, with ART cycles showing consistent growth over the past 20 years. During economic downturns such as the subprime crisis and COVID-19, ART cycle growth turned negative but rebounded strongly once the crises ended. This historical resilience supports the long-term growth outlook for Progyny.
Valuation
Progyny is expected to accelerate growth back to over 30% once short-term issues are resolved and the economy recovers. Previously, growth was anticipated to reach over 30% in FY25, but this has been revised to FY26 due to current uncertainties.
Using revised FY24 revenue guidance of $1.25 billion, a linear expansion to 33% y/y growth rates is projected for FY26, leading to $1.66 billion in revenue. This is achievable given Progyny’s 38% growth last year.
The market is expected to react positively to growth acceleration, with PGNY trading up to at least 3x forward revenue, similar to its valuation in FY23 when growth was over 30%. Based on these assumptions, a target price of approximately $54 is set for FY25.
Risk Factors
Volatility in utilization rates may lead to conservative estimates from investors. Until Progyny shows improvement in utilization on a reported basis, the stock may remain rangebound. Additionally, if the economy continues to slow or enters a recession, Progyny will be directly impacted.
Strategic Positioning
Despite the revenue miss in 1Q24, Progyny remains an exciting investment. The long-term outlook for the business is positive, supported by historical trends showing resilient IVF demand and strong rebounds following economic downturns.
Leading indicators suggest that a rebound in utilization is already underway, reinforcing the growth prospects for Progyny.
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I’m Nathan Goldstein, a writer and political analyst focused on simplifying complex social and political issues. My writing breaks down the intricacies of today’s society and politics to make them more understandable for you. I’m committed to providing clear and well-informed insights.
