Investors Need a Dose of WebMD

Small biotech stocks may grab a lot of headlines, but don’t let them distract you from less-publicized yet equally exciting small caps in other areas of healthcare. For instance, in all the biotech hoopla of the past few years, how many investors overlooked WebMD Health (Nasdaq: WBMD)?

Too bad they did. Shares of the $1.8-billion firm, a world leader in providing health and medical information, more than tripled since mid-January 2013.

A powerful tailwind for WebMD’s stock: the graying of the population. The ranks of the elderly are swelling, and as people age they tend to have more health problems. They naturally want all the information they can get about those problems, and WebMD has long been a trusted source.

Growing traffic on the firm’s website is driving stronger ad sales and, in turn, the top and bottom lines. Revenue now tops $600 million annually, up from $470 million in 2012. Net income has soared to $53 million from 2012’s $20-million loss. Annual free cash flow of $79 million is nearly double that of three years ago.

The latest quarterly report (for Q3) showed an 8% increase in the number of unique visitors to 206 million per month and an 11% gain in the number of page views to four billion. Quarterly revenue rose 6% to $153 million, while earnings jumped 39% to $0.32 a share. Management expects to report the best quarter in WebMD’s history when it reveals fourth-quarter performance in a few weeks.

Importantly, WebMD also holds sway with healthcare professionals, especially physicians, who are a preferred target market for pharmaceutical and other advertising. WebMD increasingly reaches physicians through its Medscape mobile medical reference app, as CEO David Schlanger illustrated during the third-quarter conference call:

During the quarter we averaged approximately 6.8 million physician sessions per month, an increase of approximately 12% over the prior year period. For physicians and healthcare professionals throughout the world, Medscape is the premier source of medical news, clinical reference, point of care tools and medical education. In the U.S., Medscape has approximately 645,000 registered U.S. physicians that are active on an annual basis, representing a substantial majority of the practicing physicians in the US. During the third quarter, an average of approximately 380,000 U.S. physicians were active monthly.

We also reached approximately 2 million other U.S. healthcare professionals many of whom engage with patients and impact prescribing decisions, such as nurse practitioners and physician’s assistants, and are therefore an important audience for our advertisers. For health advertisers, we reach highly targeted consumers and physician audiences of scale at the time most likely to impact decision-making and with measurable outcomes.

The takeaway: WebMD still holds plenty of growth potential. So even if you missed out on it the past three years, consider being a shareholder for the next three.