SelectQuote: Strong Q2 Revenue Growth, Retaining My Hold Rating (SLQT)

SelectQuote, Inc. (NYSE:NYSE:SLQT) has just reported its fiscal Q2 numbers as Seeking Alpha has reported here. Although pre-market price actions can change direction quickly, the stock is up nearly 10% as of this writing. Did the company report fundamentally good numbers, or is this just a relief rally for a beaten down stock which was down almost 20% YTD ahead of Q2 report?

My most recent and so far, only other coverage of SelectQuote was in September 2023. I had officially rated the stock a “Hold” but concluded that it was a “Stay Away,” despite having lost 96% of its value from peak back then. Since that article, the stock has lost 10% (not including today’s pre-market run) compared to the market’s near 10% gain in the same time period.

Does today’s Q2 report and guidance change the stock’s near-term outlook? Let’s find out in the latest edition of The Good, The Bad, and The Ugly.

The Good

• Q2 marked the 6th consecutive quarter that SelectQuote has beaten revenue estimates. Revenue of $405.44 million was up 27% YoY, once again making it the 6th consecutive quarter that SelectQuote reported increasing YoY revenue. Based on trailing twelve months’ revenue, SLQT stock is trading at a price-to-sales multiple of 0.16%. Yes, you read that right. If you are wondering how could a company be so undervalued, keep reading.

• Sticking with revenue, the company also upped its revenue guidance for FY 2024, with the new guidance being $1.23 billion to $1.3 billion. The lower-end of the guidance is up a handy 17% from the prior range of $1.05 billion to $1.2 billion.
• I had highlighted in my September article that SelectQuote had reported only four quarters with positive Free Cash Flow [FCF]. While FCF has remained negative in the two quarters since, the company is expecting FY 2024’s FCF to be close to, if not absolutely, positive.

“We are also pleased with our progress on operating cash flow and now anticipate that SelectQuote will approach positive free cash flow in fiscal 2024.” (page 1).

“On pace to deliver positive operating cash flow and approach free cash flow breakeven for fiscal year 2024.” (page 3).

• While operating expenses are going up (as covered earlier), operating and marketing expense per policy has gone down significantly since 2021, both showing greater than 30% reduction.

The Bad and The Ugly

• Despite the encouraging progress on revenue, the company is still losing money and is expected to lose money in FY 2024. Operating expenses went up 32% YoY in Q2 (page 12) and is playing a significant role in impacting net income and the company’s ability to make money.

“Net loss expected in a range of $45 million to $22 million vs. prior range of $50 million to $22 million” (page 1).

• At the end of Q2 2024, SelectQuote is still carrying a massive, long-term debt load of $650 million (page 9). That’s more than 3 times the company’s market capitalization and resulted in an interest expense of $24.4 million in Q2 (page 10).
• Share-based compensation went up more than 25% YoY in the six months ending December 2023 (page 13). No wonder that SelectQuote reported almost 170 million shares outstanding at the end of Q2 (page 10) and continues its slow but sure trend of increasing share count.

Conclusion

While Q2’s revenue and FY 2024’s guidance are steps in the right direction, the company’s excessive debt load is still giving me pauses. FCF is still expected to be barely positive for FY 2024, with net income still forecasted to be negative (AKA, losing money). I am sticking with my “Hold” rating officially, but I am just relenting a bit from my “Stay Away” suggestion based on the revised guidance from the company. Before upgrading SelectQuote, Inc. to a “Buy,” I’d like to see a reduction in the operating expenses and the debt load.