Modular AI Solutions Will Transform Value-Based Healthcare

Key Takeaways

• Expansion of AI-driven solutions and proprietary data assets, along with industry trends, will drive margin growth, premium pricing, and sustained revenue gains.
  
• Platform migration and cost restructuring set the stage for improved profitability, operating leverage, and consistent technology segment growth.
  
• Health Catalyst faces ongoing revenue pressure from client spending cuts, strategic downsizing, and macroeconomic headwinds, with uncertain prospects for sustained growth and profitability.

Catalysts

Provides data and analytics technology and services to healthcare organizations in the United States.

• The company's focus on expanding its high-margin applications portfolio, driven by ongoing client cross-sell momentum and strong adoption of modular AI-enabled solutions, is positioned to accelerate gross margin expansion and adjusted EBITDA growth as macro headwinds stabilize (positively impacting margins and earnings).
  
• Migration of platform clients to the new Ignite infrastructure is expected to largely complete by mid-2026, at which point the current revenue headwinds from clients "pocketing" migration cost savings will subside-setting the stage for renewed and more consistent Technology segment growth (positively impacting revenue trajectory).
  
• Secular industry drivers-including the shift to value-based care and the demand for advanced data analytics to meet regulatory and efficiency goals-are expected to support ongoing demand for Health Catalyst's core offerings, expanding its addressable market and sustaining longer-term revenue growth.
  
• Management's proactive cost restructuring, contract repricing, and organizational streamlining are on track to deliver $40 million in annualized profitability improvements, enabling sustainable operating leverage and improvements in net margin and free cash flow-well ahead of earlier targets.
  
• The company's substantial investment in proprietary data assets, AI/ML-driven analytics, and its ability to leverage deep integration with over 1,100 healthcare clients position it to command premium pricing, foster high retention, and benefit disproportionately as digitization and AI adoption accelerate across the healthcare sector (driving both revenue and margin expansion).

Health Catalyst Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Health Catalyst's revenue will grow by 8.4% annually over the next 3 years.
• Analysts are not forecasting that Health Catalyst will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Health Catalyst's profit margin will increase from -31.7% to the average US Healthcare Services industry of 8.8% in 3 years.
• If Health Catalyst's profit margin were to converge on the industry average, you could expect earnings to reach $35.3 million (and earnings per share of $0.41) by about August 2028, up from $-100.1 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 17.2x on those 2028 earnings, up from -2.1x today. This future PE is lower than the current PE for the US Healthcare Services industry at 58.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.72%, as per the Simply Wall St company report.

Health Catalyst Future Earnings Per Share Growth

Risks

• Significant and accelerated Medicaid and research funding cuts are causing widespread financial strain and uncertainty among Health Catalyst's core end markets-especially not-for-profit and academic medical center clients-which is leading to lower client spending, smaller extension contracts, and delayed bookings, directly impacting both near
• and long-term revenue growth.
  
• A pronounced trend of existing clients "pocketing" cost savings from Ignite platform migrations, rather than reinvesting these savings in expansion or new offerings, is compressing dollar-based net retention to the low 90s and creating persistent top-line headwinds that are expected to last at least through mid-2026.
  
• The company's Professional Services segment faces strategic downsizing, including the exit of lower-margin or unprofitable contracts and workforce reductions impacting 9% of employees, resulting in immediate declines in Services revenue in 2025 and 2026, and introducing risk of weakened client support and scalability, negatively affecting both revenue and operating consistency.
  
• Persistent macroeconomic pressures, such as inflation and potential expiration of premium subsidies, combined with industry conservatism and risk aversion, are causing health systems to defer or shrink technology spending, limiting the pace of Health Catalyst's pipeline conversion and new client acquisition and thus dampening revenue growth prospects for 2026 and possibly 2027.
  
• The company's removal of ambitious 2028 revenue and EBITDA targets, stated cessation of near
• to mid-term M&A activity, and reliance on maintaining profitability through restructuring rather than organic top-line growth, collectively raise concerns about Health Catalyst's ability to reignite sustainable revenue expansion-a risk that could constrain future earnings momentum and share price appreciation.

Valuation

• The analysts have a consensus price target of $5.333 for Health Catalyst 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 $9.0, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $402.9 million, earnings will come to $35.3 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $2.92, the analyst price target of $5.33 is 45.2% higher.
  
• 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.