By Michael Kim
NASDAQ:CCLD
READ THE FULL CCLD RESEARCH REPORT
We are initiating coverage of CareCloud, Inc. (NASDAQ:CCLD) with a 12-month price target of $7.00, translating into sizeable upside from the stock’s current price. CareCloud provides technology-enabled Revenue Cycle Management (RCM), Electronic Health Records (EHR), Practice Management (PM), digital heath, and other business solutions to healthcare practices across a fully integrated platform, or via discrete Software-as-a-Service (SaaS) agreements.
Our investment thesis revolves around:
1. Unique/integrated healthcare technology/business services platform: Healthcare organizations continue to face various operational headwinds including ongoing transitions to technology-focused/value-based care models, reimbursement challenges, as insurance plans continue to evolve, mounting data entry/management administrative burdens, and staffing turnover/shortages, amongst others. As such, we believe CareCloud remains well positioned to leverage the company’s integrated suite of business/technology solutions designed to help medical practices optimize collections, drive operational efficiencies, increasingly leverage data/analytics, improve customer experiences, and ultimately accelerate growth.
Importantly, CareCloud maintains three key differentiating factors that we believe position the company for ongoing market share gains. First, CareCloud provides healthcare practices with revenue cycle management services integrated within the company’s proprietary technology platform. Second, management remains focused on increasingly leveraging the company’s proprietary technology to streamline operations and improve customer experiences for healthcare providers, and ultimately accelerate growth for CareCloud. Finally, CCLD typically offers more competitive pricing versus peers primarily reflecting the company’s offshore infrastructure.
2. Setting the stage for reaccelerating growth: Following a period of declining revenue (mostly a function of acquisition dis-synergies), we believe the stars are aligning for reaccelerating growth. At a high level, CCLD remains well positioned to increasingly tap into an estimated $155 billion Total Addressable Market (TAM) revenue opportunity, we believe. Industrywide growth drivers likely include: a) stepped-up outsourcing to bundled RCM/business solutions providers to combat rising health insurance costs and evolving plan designs; b) shifting demographics, with government-sponsored health insurance programs typically paying out lower reimbursement rates relative to private insurance plans; and c) ongoing regulatory reform.
Focusing on organic growth, we believe CCLD’s comprehensive/integrated suite of RCM, EHR, and practice management services combined with the company’s proprietary technology and lower-cost offshore workforce remain key differentiated factors. In addition, management remains focused on enhancing CareCloud’s brand awareness, expanding the company’s client footprint, increasingly cross-selling to existing clients, broadening services capabilities, and leveraging existing relationships with third parties to further build out an ecosystem of strategic partners.
3. Increasingly leveraging M&A: In addition to organic initiatives, we look for stepped up acquisition activity to increasingly turbocharge growth. Indeed, CCLD maintains a long and successful track record of acquiring RCM companies. The CCLD M&A playbook typically includes buying distressed and/or sub-scale RCM companies that lack proprietary technology at less than 1x sales to acquire existing customer relationships. Post-acquisition, management leverages CareCloud’s technology capabilities and offshore talent to reduce labor costs, improve efficiencies, and drive outsized Returns on Investment (ROIs) and strong revenue growth.
Our hypothetical M&A equity financing model puts deal-related revenue accretion at ~$120 million, or in excess of the company’s current run-rate. That said, our analysis assumes senior executives issue 100% of available shares (including 50 million of incremental shares subject to shareholder approval less Series A Preferred Stock conversion), with the proceeds put to work with immediate effect. More than likely, equity capital raises and related deployment will play out over time, thereby limiting upfront shareholder dilution and M&A accretion.
4. Rising earnings power + strengthening balance sheet: Excluding stock-based compensation expense, amortization of purchased intangible assets, other (income)/expense, and non-recurring items, as well as preferred stock dividends, we forecast Adjusted EPS of $0.61 and $0.94 for 2024 and 2025, respectively. More specifically, we expect a step up in revenue growth in the back half of this year followed by reaccelerating growth in 2026, as business development initiatives increasingly take hold and management captures more economics from existing customers via complementary services. Furthermore, we look for ongoing margin expansion primarily reflecting management’s cost reduction plan centered on headcount reductions and lower selling and marketing costs that was implemented in 2023 and 2024. Looking forward, management remains focused on extracting further efficiencies, particularly as it relates to increasingly leveraging Artificial Intelligence (AI) and technology more broadly to drive higher margins. Moreover, we expect CCLD to continue to leverage the company’s lower-cost offshore infrastructure – reinforcing a key financial/margin advantage for CareCloud.
Following more recent moves to strengthen the balance sheet, management is seemingly “switching to offense” from a capital allocation perspective. Looking ahead, priorities likely remain reinvesting in the business to accelerate growth, capitalizing on M&A opportunities, and reinstating dividends on CCLD’s 8.75% Series A and Series B Cumulative Redeemable Perpetual Preferred Stock.
5. Valuation upside: While CCLD materially outperformed peer stocks and the broader equity markets in 2024 (reflecting rising confidence in the sustainability of the business and growth prospects going forward following initiatives to right-size the company’s cost structure, strengthen the balance sheet, and enhance cash flows), we see further room to run for the stock, as awareness and appreciation of the company’s unique business model, durable competitive advantages, reaccelerating growth prospects, and valuation disconnect increasingly take hold. On top of that, we view the reinstatement of preferred stock dividends in March as a key near-term catalyst for the shares, with insiders owning nearly 40% of common stock outstanding, thereby reinforcing strong management/shareholder alignment.
Despite what we believe to be conservative inputs/assumptions, our DCF model suggests a wide disconnect between CCLD’s fundamentals and the stock’s current price. Furthermore, comparable Healthcare Information Services small cap stocks trade at meaningfully higher Price-to-Earnings multiples across the board. While we recognize most companies on the list are meaningfully larger, with considerable infrastructure, resource, and financial advantages, CCLD maintains a sizeable advantage in terms of projected growth, thereby justifying a comparable (if not higher) P/E multiple, in our minds.
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