AVA Integration And High Stars Ratings Set To Improve Future Margins

Key Takeaways

• Significant membership growth outside California and high Stars ratings are driving revenue growth and enhancing market footprint.
  
• Achieving EBITDA profitability and AVA-driven care management are improving operational efficiencies and boosting net margins.
  
• Dependence on membership growth and CMS ratings, alongside market expansion risks, could threaten revenue, margins, and profitability under evolving policies.

Catalysts

Operates a consumer-centric healthcare platform for seniors in the United States.

• Alignment Healthcare demonstrated significant membership growth, particularly outside California, which could drive continued revenue growth as the company expands its market footprint and capitalizes on its Stars ratings.
  
• The company achieved adjusted EBITDA profitability for the first time in 2024 and expects further EBITDA margin expansion in 2025, indicating improved operational efficiencies that can enhance earnings.
  
• The integration of clinical staff and the use of AVA for managing care could lead to lower costs and higher net margins by improving medical management and reducing inpatient admissions per 1,000 members.
  
• Optimizing stars ratings, with a high percentage of members in plans rated 4 stars or above, positions the company to benefit from better reimbursement rates in the future, thus positively impacting revenue and margins.
  
• With over 50% of members in early cohorts, there is potential for increased gross profit over time as these members mature, creating an embedded opportunity to double the current gross profit without needing incremental membership growth, thus boosting future earnings.

Alignment Healthcare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alignment Healthcare's revenue will grow by 28.9% annually over the next 3 years.
• Analysts are not forecasting that Alignment Healthcare will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Alignment Healthcare's profit margin will increase from -4.7% to the average US Healthcare industry of 4.9% in 3 years.
• If Alignment Healthcare's profit margin were to converge on the industry average, you could expect earnings to reach $284.3 million (and earnings per share of $1.47) by about April 2028, up from $-128.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, up from -28.4x today. This future PE is lower than the current PE for the US Healthcare industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Alignment Healthcare Future Earnings Per Share Growth

Risks

• Dependence on rapidly growing membership to drive revenue increases might risk revenue stability if membership growth slows, potentially affecting overall revenue growth.
  
• The reliance on maintaining high star ratings to achieve favorable CMS reimbursement could be challenged by policy changes or errors in maintaining quality outcomes, impacting net margins and earnings.
  
• The high concentration of new members in early cohorts presents a risk if member engagement or maturation does not proceed as planned, potentially impacting the improvement in margins and earnings.
  
• Part D changes due to the Inflation Reduction Act and uncertainties in utilization patterns could lead to financial pressure, influencing adjusted gross profit and earnings.
  
• Execution risks in expanding into new geographical markets outside California could lead to increased operational costs and challenges in maintaining profitability, thus affecting net margins.

Valuation

• The analysts have a consensus price target of $18.091 for Alignment Healthcare based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $284.3 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $18.95, the analyst price target of $18.09 is 4.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.