Key Takeaways
- The conventional wisdom that share prices follow free cash flow is being tested by Oscar Health, where a volatile cash flow profile complicates a straightforward valuation narrative. The trajectory and sustainability of cash generation matter more than any single quarter’s figures.
- Oscar’s financial viability hinges almost entirely on its ability to manage its Medical Loss Ratio (MLR). Achieving a consistent MLR below the crucial 85% threshold is the primary lever for converting impressive revenue growth into sustainable free cash flow.
- Valuation is a battleground between bullish growth metrics, such as a 46% year-over-year revenue increase, and bearish operational realities, including historical cash burn and intense competition within the US health insurance market.
- Despite management’s optimistic guidance for its first full year of Adjusted EBITDA profitability in 2024, the market remains sceptical, pricing in significant execution risk.
The notion that a company’s share price will inevitably follow its free cash flow, as suggested in a recent observation by analyst TheLongInvest regarding Oscar Health, is a foundational tenet of value investing. For a high-growth, technology-driven firm like Oscar, however, this relationship is far from linear. The company’s journey is a compelling case study in the tension between staggering top-line growth and the arduous path to sustainable cash generation. While the market is evidently rewarding Oscar’s progress, a deeper look at its operational mechanics reveals that its long-term valuation depends less on cash flow itself, and more on the mastery of a single, crucial insurance metric.
Deconstructing the Cash Flow Narrative
Free cash flow (FCF) offers a cleaner view of a company’s financial health than net income, as it represents the cash available after all operational and capital expenditures are paid. For a business like Oscar, which is still chasing GAAP profitability, positive FCF can be an early indicator that the model is working. Yet, its historical performance illustrates the volatility inherent in a high-growth insurer.
After years of significant cash burn to fuel expansion and build its technology stack, Oscar has shown signs of a turnaround. This progress, however, must be viewed as nascent. A single quarter of positive cash flow does not make a trend, particularly when driven by timing factors in premium collections and claims payments. The market’s challenge is to distinguish a genuine inflection point from a temporary improvement.
| Period | Revenue | Net Income | Free Cash Flow |
|---|---|---|---|
| Fiscal Year 2023 | $5.98 billion | ($307 million) | ($71.8 million) |
| Fiscal Year 2022 | $3.62 billion | ($610 million) | ($757 million) |
| Fiscal Year 2021 | $1.04 billion | ($571 million) | ($463 million) |
| Source: Data compiled from Yahoo Finance financial statements. All figures are approximate. | |||
As the table demonstrates, the scale of historical losses and cash burn has been substantial. The significant improvement in FCF from 2022 to 2023 is notable, but it is the transition into sustained positive territory that will ultimately validate the business model.
The Decisive Metric: Medical Loss Ratio
For any health insurer, the most critical operational lever is the Medical Loss Ratio (MLR). This metric represents medical claims expenses as a percentage of premium revenues. A lower MLR indicates superior underwriting and cost control, leaving more money to cover administrative costs and, eventually, generate profit. The Affordable Care Act (ACA) mandates that insurers spend at least 80-85% of premium dollars on healthcare claims and quality improvement, creating a tight corridor for profitability.
Oscar’s primary challenge has been to bring its MLR down to a consistently profitable level. The company has made significant strides, reducing its InsuranceCo Combined Ratio—which includes the MLR and administrative expense ratios—from 108.9% in Q1 2023 to 98.7% in Q1 2024. Management has guided for a full-year 2024 MLR of 82.2% to 83.2%. Achieving this would be a landmark event, signalling that its technology-led approach to member engagement and cost management can deliver industry-competitive results.
Valuation in the Balance
Oscar’s current valuation reflects this dichotomy. On one hand, its growth is undeniable. Revenue grew 46% year-over-year in the first quarter of 2024 to $2.1 billion. The company also raised its full-year guidance, now expecting to achieve its first full year of Adjusted EBITDA profitability. Analyst forecasts reflect this optimism, with consensus estimates predicting dramatic earnings per share growth in the coming year.
On the other hand, the market remains cautious. The health insurance industry is notoriously difficult, dominated by giants like UnitedHealth Group and Elevance Health, which benefit from immense scale and pricing power. Oscar is still a relatively small player trying to disrupt a sector with powerful incumbents and high regulatory barriers. Its share price volatility is a direct reflection of the market weighing the potential for disruptive growth against the considerable execution risks.
| Metric | Oscar Health ($OSCR) | UnitedHealth Group ($UNH) |
|---|---|---|
| Market Capitalisation | $4.4 billion | $450 billion |
| Price / Sales (TTM) | 0.65 | 1.21 |
| Q1 2024 Revenue Growth (YoY) | 46% | 8.6% |
| Forward P/E | ~30x (Est. for 2025) | ~15x |
| Source: Data compiled from Yahoo Finance & Seeking Alpha. Figures are approximate and subject to market changes. | ||
The comparison highlights the classic growth versus value dynamic. Investors are paying a premium for Oscar’s future growth potential, while the established players trade at more modest, cash-flow-backed multiples.
Conclusion: A Hypothesis on the Re-rating Trigger
Following the free cash flow is sound advice, but for Oscar Health, it requires looking ahead. The cash flow will follow the Medical Loss Ratio, not the other way around. While management’s guidance is encouraging, the market will likely require proof before fully embracing the turnaround story. The path forward is clear, yet fraught with risk.
Herein lies a speculative hypothesis: the structural re-rating of Oscar’s shares will not occur upon the first quarter of positive free cash flow, as this is largely anticipated. Instead, the key catalyst will be the demonstration of two consecutive quarters with a sub-84% MLR, coupled with continued double-digit growth in membership. Such a performance would signal to the market that Oscar’s model is not just scalable but sustainably profitable, forcing a reappraisal from a speculative ‘insurtech’ towards a high-growth healthcare company. At that point, the share price will not just follow the cash flow; it will race to catch up with it.
References
@TheLongInvest. (2024, May 1). [Follow the Free Cash Flow Because the Share Price will follow it too. $OSCR]. Retrieved from https://x.com/TheLongInvest/status/1887104132223283485
