Goosehead Insurance: Overvalued Stock Price (NASDAQ:GSHD)

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Goosehead Insurance, Inc. (NASDAQ: GSHD) remains formidable amid pandemic disruption. The solid growth in its turnover shows that it can maintain its operational capacity. It has even more potential this year as pent-up demand for RVs and properties persists.

Meanwhile, the stock price has been separated from its fundamentals since Q4 2021. But the overvaluation suggests it is trading 10-20 times higher than the reasonable price. The downward trend may persist, but the industry boom may still exert upward pressure.

Business Performance

Goosehead Insurance, Inc. has only been around for twenty years, but that proves its durability. She has witnessed and survived crises that have disrupted the financial sector. Since going public, GSHD has seen consistent revenue growth. All of its business segments have flourished as operating capacity. Indeed, the IPO helped it fund its expansion and strengthen its market presence. It proved to be successful as it captured more demand and withstood the scourge of the pandemic. Also, it exceeded my expectations in the previous article, as actual earnings were 16% higher.

Today, Goosehead has more promising growth prospects. In fact, the insurance industry as a whole continues to thrive. Indeed, the pandemic and natural disasters highlight the importance of having insurance. It’s no wonder the company is seeing an influx of customers amid drastic changes. Operating revenue for this quarter was $41 million, up 32% year over year. Thanks to the company’s massive expansion in 2021. It benefits from the fallout of increased office openings. Now, it can cater to more customers across the country as demand continues to rise. Moreover, its digital agents allow it to contact customers despite the restrictions.

Goosehead Insurance Revenues and Operating Expenses

Operating revenue and operating expenses (Market watch)

Similarly, its total operating expenses are $47 million, an increase of 47%. With that, the company now shows an operating margin of -0.145. Basic trading values ​​can become a turning point for many investors. This can show inefficiency and mismanagement of resources in the face of macroeconomic pressures.

Goosehead Insurance Operating Margin

Operating margin (Market watch)

But we must remember that the value still reflects the impact of the previous expansion. We can see that it is starting to bear fruit and could become fruitful over the next few quarters. Above all, the company makes its employees its priority. The increase in salaries and benefits is the main driver of operating expenses. Therefore, the company shows strong working capacity, leading to higher productivity. It also maintains its operational size without sacrificing the quality of its services.

Plus, the expansion is a wise move as the hype around motorhomes, cars and properties escalates. The thing is, there are more opportunities in the market that Goosehead could take advantage of. As more and more people buy RVs, cars and homes, the demand for RV, auto and property insurance is high. As such, it’s no surprise that analysts are bullish on the industry’s performance. These will be discussed in more detail in the next section.

How Goosehead Insurance, Inc. can maintain its position in the market

Despite the operating loss, Goosehead Insurance has a strong market position. The increase in operating expenses is not due to operational inefficiencies. Personally, it’s more of an investment. Healthier, happier agents and employees are more efficient, which leads to more customers. Increased office openings and digital capabilities lead to better accessibility. In addition to the greater operating capacity, it is linked to economies of scale for the next few years.

This can be proven by its stable balance sheet. Borrowing is more manageable today after the drastic increase the previous year. Of course, the recent expansion continues to stimulate both borrowing and spending. But this year, the accounts seem more stable. In addition, liquidity is maintained. Its cash and receivables, for example, represent 22% of total assets. In addition, its fixed assets are 57% higher than those of the comparative quarter. As such, he is able to maintain his current size with ease and caution. It can also increase its operating capacity by 30% even without financial leverage. Substantial revenue growth and liquidity testify to effective asset management. There is also financial consistency, which shows sustainability.

Goosehead Insurance Cash and current receivables, fixed assets and borrowings

Cash and current receivables, fixed assets and borrowings (Market watch)

But beyond its strong fundamentals, external forces could continue to drive its growth. Goosehead operates in a wide range of properties, from homes to RVs and cars. Today, the market boom continues, allowing the company to sell more of its products. For example, demand for housing remains on the rise despite soaring prices. Over the past two years, the median price has already increased by 30%, from $329,000 to $428,700. The housing shortage remains a challenge, but inflation could start to slow it down this year.

Despite this, home insurance is expected to continue to grow. Global insurers estimate property insurance to grow by 3.7% in 2022 and 3.3% in 2023. Frequent natural disasters are also driving demand for home insurance. Home insurance may also cover personal effects, such as furniture and equipment. With more demand despite restrictions, virtual reality is now a staple in the real estate market. It’s no surprise that real estate accounts for $2.6 billion in the VR market. Fortunately, Goosehead Insurance is already adapting to digital transformation. With his digital agents, he can conduct virtual transactions with his target market.

Home insurance increase rate

Home insurance increase rate (Insurance Journal)

Cars and motorhomes are other potential growth engines for Goosehead Insurance. Despite rising fuel prices, demand for outdoor recreation remains high. In a recent survey, new and used cars are still a must. Despite the easing of restrictions, 76% of commuters prefer to drive a private car. The remaining part is made up of public transport, bicycles and other alternatives. That’s why analysts estimate that 15.2 million cars will be sold this year, a year-on-year growth of 1.2%. Additionally, more and more drivers today are willing to pay $1,732 for comprehensive auto insurance.

Commuter preferences

Commuter preferences (Statist)

Likewise, RVs are heating up as travelers choose to go locally this spring and summer. A recent survey shows that 56 million Americans are considering buying or renting motorhomes for their summer trips. The number could still climb to 65 million in twelve to twenty-four months. As such, the VR market could continue to grow in the years to come. This trend may benefit RV insurance providers like Goosehead Insurance. A recent estimate shows that the RV insurance market could grow by 4.2% per year.

People buying or renting RVs

People buying or renting RVs (Camper Report)

Given these potential drivers, the increase in the workforce and office openings is timely. This could boost the growth of its core businesses. Its increased digital capabilities could improve its business processes and attract more customers. Operating revenue and expenses could rise to $196-320 million and $186-256 million. Similarly, the following quarters could compensate for the operating loss in 1Q 2022. Therefore, the operating margin could increase to 0.052-0.20.

Goosehead Insurance Revenues and Operating Expenses

Operating revenue and operating expenses (Author’s estimate)

Goosehead Insurance Operating Margin

Operating margin (Author’s estimate)

Price evaluation

Goosehead Insurance, Inc.’s stock price has been trending lower since the previous quarter. At $51.25, it’s already been discounted by 66% from the starting price. The trend has been strong, and the price is already much lower than my previous article. Despite this, the potential overvaluation is obvious. The PE ratio shows that GSHD is trading 15-20 times higher than the reasonable level. If we compare it to operating income, the overvaluation is still evident by 8-10 times. To better evaluate it, we can use the DCF model.

FCFF

$16,800,000

Species

$24,800,000

Loans in progress

$16,000,000

Perpetual growth

8.00%

WACC

4.80%

Common shares outstanding

20,000,000

share price

$51.25

Derived value

$30.44

The derived value is a confirmation of the potential overvaluation. It shows that the stock is trading 68% higher than the ideal price. Over the next 12 to 24 months, there could be a decline in the stock price. Nevertheless, the company’s growth prospects remain attractive. There could be further upward pressure if the industry boom continues.

At the end of the line

Goosehead Insurance, Inc. remains stable with its impressive revenue growth and liquidity. Its solid performance shows its suitability for its sustainability and its potential for expansion. But the share price still seems divorced from the fundamentals. Although growth prospects are still attractive, overvaluation could tell a different story. The recommendation, for now, is that Goosehead Insurance, Inc. is on hold.

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