Fructivore Investments

It is always difficult being a minority shareholder. Well, obviously most people reading this are not going to be the majority shareholder of a public company (and if you are, I am available for consultation at reasonable rates).

But I mean a minority shareholder of a company that has a such majority holder or group that has the power to control the entire company. The defects in such an arrangement are two-fold, one being the fact that the officers and management cannot be replaced for incompetence. For this reason, publicly traded companies with an entrenched majority often trade at a discount that varies according to the market’s perception of management quality.

The other disadvantage in this arrangement is the possibility that the majority holders will enrich themselves at the expense of the outside shareholders. Although Delaware law offers some protection for shareholders against this possibility, this requires costly litigation and in the absence of a clear-cut case there may be some reluctance to pursue this outcome.

Which brings us to GoodRx, a company with two classes of shares, one publicly traded and one not so much. The company is in the business of discount prescription drugs, operating in the shadows of the health insurance industry to provide an alternative nexus between pharmaceutical companies and the public. The company came to my attention during a routine flipping through the Value Line, but the figures in most finance data aggregators doesn’t account for GoodRx’s two classes of shares. Yahoo! Finance, for example, records a market cap of $1.74 billion as of this writing, which corresponds to 361 million outstanding shares. However, the class A shares, which are publicly traded, number only 104 million, and the remaining 257 million are class B shares, which are not publicly traded and have 10 votes instead of one for the class A shares, so the actual float of the company is only $500 million. The class B shares can be converted into class A shares at will, but the holders have only done so in order to engage in share repurchases, for which use the company has expended a considerable amount of the company’s cash.

At least the company has not concealed this intent; GoodRx’s latest 10-K states: “There have been no material changes in the expected use of the net proceeds from our IPO as described in our
Registration Statement. As of December 31, 2024, we estimated we had used approximately $586.4 million of the net proceeds from our IPO: (i) $164.4 million for the acquisition of businesses that complement our business; (ii) $262.0 million for the repurchases of our Class A common stock; and (iii) $160.0 million for the repayment of our outstanding debt obligations. As of December 31, 2024, we had $300.5 million estimated remaining net proceeds from our IPO…” and indeed the balance sheet shows $301 million in cash.

I should point out that the registration statement’s “Use of proceeds” section doesn’t mention share repurchases; it mentions acquisition of businesses and general corporate purposes and only a desultory mention that “We may find it necessary or advisable to use the net proceeds for other purposes….” such as, say, providing an exit strategy for a cabal of private equity firms when the share price has declined dramatically since the IPO. (It took me a while to write this article because I was trying to strike the right balance between expressing my opinion and avoiding libel suits).

Actually, what tripped my sensors for GoodRx was its high operating cash flow, which only arises because of the massive amounts of share-based compensation; in fact, the share-based compensation is comparable in magnitude to the quantity of share repurchases in a given year. There are two possible explanations for this, neither of them particularly encouraging. One, the company is finding ways to justify its shareholder repurchases with massive stock grants for some nefarious purpose I’m not quite clear on. Or two, the company is unprofitable enough that it has to pay its employees in stock rather than cash. Normally at this point I would compare GoodRx with its competitors to find an answer, but it seems that they don’t have any publicly traded competitors.

Either way, maybe in 2028 all the class B shares will convert into class A shares so the group may be getting out while the getting’s good, although at the current rate of repurchases the company will have burned through its remaining excess cash by then.

Looking at the figures, operating margins have improved since 2022, as have sales. For 2024 sales were $792 million, operating income was $66 million, net of $99 million in share-based compensation. Depreciation and amortization equaled capitalized software, so by my usual calculation operating cash flow remained at $66 million, and interest expense for the year was a whopping $53 million. The company also finished the year with $450 million in cash on which it earned $23 million in interest, so the interest coverage situation is not desperate, although it seems rather dire for my taste. This leaves $36 million before estimated taxes, or $29 million after taxes. For a float of $500 million this is not unreasonable, although too low for my taste, but let us recall that the company founders, not satisfied with the $150 million in share repurchases they have received this year, are also entitled to about 72% of this money based on their ownership percentages.

In the first quarter of 2025 the company had operating earnings of $23.4 million as compared to $7.4 million the previous year, stock-based compensation expense of $19.2 million as compared to $25 million, net interest expense of $6.7 million as compared to $7.1 million, producing earnings of $12.5 million before estimated taxes, or $10 million after, as compared to $300 thousand and $225 thousand. There were also stock repurchases of $100 million and $153 million last year; I suppose the company is in the habit of doing its repurchases early in the year.

The company’s remaining cash balance, as I said, was $300 million, and normally, as with BorgWarner I would consider it as non-operating and available to the shareholders, but based on GoodRx’s history I think that money is available primarily to the class B controlling shareholders, not the poor outside investors with the publicly traded shares with their claim on only 28% of the company’s earnings.

Obviously I don’t recommend GoodRx; the free cash flow yield is somewhat anemic even setting aside the two tiers of stock, and without setting that aside the yield is certainly not fair compensation for the minority status. It’s more of an object lesson in the dangers of an entrenched majority owner and the foibles of stock screening.

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Investing by grocca