Waterdrop: Very Undervalued AI-Driven Marketplace For Insurance Products

seekingalpha09-10

Waterdrop Inc. is significantly undervalued, with expected FCF growth driven by AI-driven customer experience, proprietary CRM, and technical connections with large insurance carriers.The company's ...

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Solskin/DigitalVision via Getty Images Waterdrop Inc. (NYSE:WDH) appears to be delivering FCF growth, thanks to AI-driven customer experience, proprietary CRM, and technical connection with large insurance carriers. In my opinion, in combination with the contributions to clinical trials offered by WDH and the medical crowdfunding business model, WDH will most likely bring future net sales growth. I see some risks from the fact that the company does not operate in the United States and potential failed mergers and acquisitions. However, in my opinion, conservative forecasts about free cash flow growth indicate that Waterdrop is significantly undervalued right now. I expect growing demand for the stock as a result of the recently announced stock repurchase program.   Source:TradingView Waterdrop The company presents itself as a technology platform offering insurance and healthcare services. The company's marketplace appears to have experienced significant growth in the most recent history, and could have significant business potential. The company's marketplace, Shenlanbao Insurance Marketplace, reported close to 115.3 million customers including 32.3 million paying clients. Given the population in China, I think that the number of paying customers could increase substantially. In addition, it is worth noting that the insurance coverage to emerging middle class in China could also receive significant demand in the coming years. The company offers a long list of insurance products as a result of the agreements with 101 insurance carriers. We are talking about close to 1,357 types of health and life insurance products online. Products include long-term health and life insurance, short-term health insurance, medical insurance, casualty insurance, and critical illness insurance among others. Clients can pay annually as well as monthly. In the last quarterly report, WDH delivered better than expected EPS Normalized figures, but lower than expected quarterly revenue growth. With that, the EPS expectations for 2025, and 2026 seem quite beneficial.   Source: Seeking Alpha  Source: Seeking Alpha Business Catalyst #1: AI-driven Customer Experience, And Data Origination In my view, the company's AI-driven claim review system is one of the most attractive functions of the company's technology. Clients seem to receive exactly offers that match their needs, and they can upload documents and receive fast reviews from Waterdrop's customer service team. The company is also equipped with real-life cases and data analytic capabilities, which allow teams inside Waterdrop to offer insurance products adapted to customer's requirements. Waterdrop also appears to count with employees offering significant medical knowledge and expertise, who can bring responses to questions brought by potential customers. In my opinion, investors may also take into account the company's data analytic capabilities, which grow thanks to new transactions. In my opinion, if the company's insurance propositions become more precise thanks to Waterdrop's models and algorithms, I would be expecting an increase in free cash flow growth. The following text was taken from the most recent annual report. Leveraging our data analytic capabilities, we are able to explore potential consumer needs, develop new business initiatives and provide technology solutions. With the increasing volume of transactions through our platform, our data becomes richer, feeding into our machine learning and data science-enabled feedback loops. As a result, our models and algorithms become more precise. Source: 20-F Business Catalyst #2: Proprietary CRM, And Technical Connection With Insurance Carriers The company appears to have developed its own CRM system, which will most likely improve commission revenue from insurance products and customer relationship management. The company also seems to have agreements with large insurance corporations under which the company provides website channels, apps, and risk management services. I think that these long-term agreements will most likely serve as net sales catalysts in the future. Besides, if large insurance corporations trust Waterdrop, in my view, other investors and large insurance companies could sign new agreements with the company. Business Catalyst #3: Experience Acquiring Competitors The company acquired Shenlanbao, which offers insurance knowledge-based content and insurance product reviews, for RMB360.0 million. In my view, the experience accumulated in the acquisition of Shenlanbao could serve in the future. With some cash in hand and growing free cash flow growth, I think that management could launch new acquisition attempts of other peers. As a result, net sales growth may not only come from AI intelligence and organic growth. The company's acquisitions could also represent a fantastic business catalyst for growth. Business Catalyst #4: Medical Crowdfunding Growth The company developed a medical crowdfunding campaign in which patients can share their medical record, and receive donations through crowdfunding links. The traffic generated by the campaigns of patients also seems to benefit the company's online insurance marketplace. In my view, the synergies created by the medical crowdfunding platform and the insurance marketplace could accelerate net revenue growth in the coming years. The company offered the following explanation about the medical crowdfunding growth in the last annual report. Viewers are able to see their social network friends who have donated to certain crowdfunding campaigns, which may encourage them to forward, share and donate. We may also boost the online dissemination for certain campaigns by providing technology support to increase online presence and large traffic. The campaign page also contains promotion of our online insurance marketplace. Source: 20-F Business Catalyst #5: Fraud Prevention Like most insurance and marketplaces out there, the company has put in place a number of systems to prevent fraud. Waterdrop does not only contact hospitals. The company also pays directly to healthcare institutions. It avoids making direct payments to customers. Besides, Waterdrop appears to collaborate with a third-party commercial bank, which offers a custodian bank account for each of the company's medical crowdfunding campaigns. In my view, these fraud prevention systems will most likely help the company in becoming more trustworthy and more transparent with investors and clients.  We also collaborate with hospitals to prevent fraud. In certain situations, we may arrange fund remittance into the hospital’s account directly rather than into the patient’s personal account. Source: 20-F We cooperate with a third-party commercial bank and set up a custodian bank account for medical crowdfunding campaigns, within which respective account could be created by each patient on our medical crowdfunding platform. Source: 20-F  Business Catalyst #6: Digital Clinical Trials Waterdrop also receives income from biopharmaceutical companies. The company selects suitable patients that collaborate in clinical trials. Under my financial model, I also assumed that revenue from clinical trials will most likely continue to enhance future net sales growth. In my view, given the access that Waterdrop has to medical history and trust received from patients in the crowdfunding business, the number of potential candidates for clinical trials will most likely increase. The company provided the following information about this specific business model in the last quarterly report. We match qualified and suitable patients for enrollment in clinical trials for our customers and generate digital clinical trial solution revenue for successful matches and we typically charge our customers a fixed unit price per successful match. Source: 6-k My Price Target My valuation model includes several assumptions about future operations. I assumed that future development of AI technologies, algorithms, and databases will most likely enhance customer experience and understanding of client behavior. I also included assumptions with regard to successful medical crowdfunding growth and traffic from clients looking for crowdfunding to the company's insurance offerings. Besides, I assumed that acquisitions of competitors could bring significant net income growth in the coming years. My numbers are in line with the free cash flow reported in the last two years, and include a small free cash flow growth, which would lead to an increase in FCF from $15 million in 2025 to close to $36 million in 2031.   Source: Seeking Alpha I also assumed a WACC of 10% and terminal EV/FCF close to 10x, which implied total enterprise value of $318 million, equity valuation of $712 million, and a fair price close to $1.8 per share. It is worth noting that other analysts obtained a target price close to my implied fair price.   Source: My Expectations  PV of FCF: $130.17 million NPV of TV: $188.44 million Total EV: $318.61 million Net Debt: -$394 million Equity: $712.61 million Shares Outstanding: 388 million Target Price: $1.84  The price target offered by other investment analysts is not far from that I obtained. According to the Seeking Alpha, the upside potential in the stock price that other analysts found is larger than 61%.   Source: Seeking Alpha  Source: Seeking Alpha It is worth noting that WDH appears significantly undervalued as compared to other competitors. WDH operates in China, which may explain the recent undervaluation. With that, I think that the current valuation is too cheap. I think that the company is a buy at the current price mark.   Source: Seeking Alpha I think that management understood that its shares are quite cheap. Recently, the company authorized to repurchase ADSs worth $50 million. In my view, the demand that the company could bring as a result of the new transaction could enhance the current stock price. The board of the directors of the Company has approved a new share repurchase program whereby the Company is authorized to repurchase its own ordinary shares in the form of American depository shares with an aggregate value of up to US$50 million during the 12-month period through September 9, 2025. Source: 6-F Risks From The Operations In China Certain shareholders could dislike the fact that the company operates in China. China is a foreign jurisdiction, and many business laws are very different from that in the United States. In addition, changes in the regulatory framework, which in western territories may not make sense, could take place in China. Besides, judges in the United States will most likely not be able to enforce actions against the company or its directors being located in China. Some of these issues may explain why the company trades at its current price mark. Risk From Lower Free Cash Flow Than Expected My forecasts about future free cash flow were based on recent free cash flow reported in the last two years and recent FCF growth. I also made several assumptions about the business model, which may fail. In the future, free cash flow may not be positive, and net income growth may also not continue. As a result, I would expect a decline in the expectations of financial analysts and a decline in the demand for the stock. In sum, we could see stock price declines. Risks From Failed Customer Experience, Failed AI Technologies, And Lost Connections With Insurance Companies The company is investing a lot of money to offer exactly insurance products that customers need. With that, investments in AI, algorithms, databases, and analysis may not return positive ROI. If clients do not buy the insurance products offered by Waterdrop, I would expect a decline in net sales growth, net income growth, and FCF growth. As a result, we could be expecting decline in the stock price and declines in the demand for the stock. I would also expect a significant decrease in future FCF growth in case of losing the links and agreements with large insurance companies. In my view, if Waterdrop fails to offer insurance products from a long list of insurance providers, clients may not visit the company's websites. Risks From A Decline In The RMB In China Though the company delivers consistent free cash flow growth, declines in the RMB could damage the ROI. If the dollar is stronger than the RMB, investors in the United States may suffer losses driven be declines in the RMB/USD rate. Other risks with regard to the economy in China include a decline in consumption, economic recession, increases in public healthcare plans, and new regulations with regard to the insurance laws in China. Conclusion Currently trading significantly undervalued, Waterdrop will most likely continue to deliver FCF growth thanks to AI-driven customer experience and data origination. Moreover, taking into account the company's medical crowdfunding business model, the digital clinical trials, and the fraud prevention efforts, I expect further net income growth in the coming years. There are obvious risks from the fact that Waterdrop operates in China, future failed mergers and acquisitions, and changes in the healthcare regulations in China.  Having said that, in my view, most analysts making forecasts about future free cash flow growth would conclude that Waterdrop is worth much more than what the market discloses. I would expect certain demand for the stock and stock price improvements as soon as the company repurchases more of its shares.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2466942432"}