Ontrak, Inc. (OTRK) is a leading AI and telehealth-enabled healthcare startup that aims to help people improve their health and save lives. The company identifies, engages, activates, and offers treatment paths for the most vulnerable individuals of the behavioral health population who might otherwise fall through the healthcare system's cracks.

The company is pursuing various strategies to combine artificial intelligence, predictive analytics, and digital interfaces with hundreds of care coach interactions to enhance member health, optimize healthcare system use, and provide long-term results. However, OTRK’s stock has declined 81.1% year-to-date and 56.6% over the past three months to close yesterday’s trading session at $11.71.

Though the company surpassed the consensus earnings estimate for the third quarter, the ongoing lawsuit and current business headwinds, such as losing major clients, have impacted the revenue growth. This could also exacerbate OTRK’s poor price performance in the upcoming months.

Here is what could influence OTRK’s performance in the upcoming months:

Business Headwinds

In August, an unidentified customer informed the company that it would withdraw from OTRK's program by the end of the year, roughly halfway through a three-year deal for $90 million. OTRK stated that it had billed this client $42 million, leaving $48 million unpaid.

In addition, OTRK lost its largest customer, Aetna Inc., a subsidiary of CVS Health. The company terminated its contract with OTRK on June 26.

Ongoing Lawsuit

In August, Bragar Eagel & Squire P.C started investigating certain officers and directors of OTRK on behalf of long-term shareholders. The complaint alleges that the defendants made materially false and misleading statements throughout the Class Period, as well as failing to disclose material unfavorable facts regarding the company's business, operations, and prospects. Because investors are concerned about the lawsuit, OTRK’s stock could take a hit.

Inadequate Financials and Poor Profitability

For the third quarter, ended September 30, 2021, OTRK’s revenue declined 22.6% year-over-year to $18.59 million. The company’s operating loss grew 81.8% from its  year-ago value to $5.47 million, while its non-GAAP net loss surged 53.2% from the prior-year quarter to $4.45 million. The company’s non-GAAP loss per share came in at $0.54 over this period. In addition, its net cash used in operating activities increased 82.6% for the nine months ended September 30, 2021, to $11.12 million.

OTRK’s trailing-12-months EBITDA, levered FCF margin, and EBIT margin are negative 8.5%, 15.4%, and 115%, respectively.

Poor Growth Prospects

Analysts expect OTRK’s EPS to decline 155.6% in the next quarter and 43.1% in the current year. Also, the company’s EPS is expected to remain negative in the current year and next year. Furthermore, the company failed to beat the Street’s EPS estimates in two of the trailing four quarters. In addition, OTRK’s revenue is expected to decline 24.2% year-over-year to $63.6 million.

POWR Ratings reflect Bleak Prospects

OTRK has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. OTRK has an F for Stability. The stock’s beta of 2 justifies the Stability grade.

The stock also has a C grade for Quality and Growth. The company’s poor financials in its  last reported quarter and negative profit margins are in sync with these grades.

Of the 88 stocks in the D-rated Medical – Services industry, OTRK is ranked #70.

Beyond what I have stated above, we have rated OTRK for Sentiment, Momentum, and Value. Get all OTRK ratings here.

Click here to checkout our Healthcare Sector Report for 2021

Bottom Line

OTRK’s poor fundamentals, an ongoing lawsuit, and bleak growth prospects have raised investors’ concerns regarding the stock’s future price performance. Moreover, the company is currently trading below its 100-day and 200-day moving averages of $18.53 and $30.80, respectively, indicating bearish sentiment. Thus, we think the stock is best avoided now.

How Does Ontrak Inc. (OTRK) Stack Up Against its Peers?

While OTRK has an overall POWR Rating of D, one  might want to consider looking at its industry peers, Mckesson Corporation (MCK), Cerner Corporation (CERN), and Computer Programs and Systems Inc. (CPSI), having an overall A (Strong Buy) rating.

OTRK shares fell $0.51 (-4.36%) in premarket trading Monday. Year-to-date, OTRK has declined -81.71%, versus a 26.75% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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