AI Integration And HSA Expansion Set To Propel Revenue Growth And Enhance Margins

Key Takeaways

• Expanding HSAs and adjacent markets could drive long-term revenue growth through increased assets, acquisitions, and a larger customer base.
  
• Digital member education and AI integration aim to reduce service costs, potentially improving net margins and enhancing member experiences.
  
• HealthEquity faces risks from increased operational costs, forecasting challenges, and potential customer attrition, affecting growth and revenue predictions amidst uncertain interest rate changes.

Catalysts

Provides technology-enabled services platforms to consumers and employers in the United States.

• HealthEquity's strategic expansion of HSAs, including a focus on growing member investments and increasing HSA assets, aims to drive significant revenue growth, enhancing the overall earnings potential of the company.
  
• The company’s ongoing shift to digital member education and the integration of AI to improve member experiences is expected to reduce service costs over time, potentially improving net margins.
  
• Legislative efforts like the HOPE Act and similar proposals to expand access to personal portable health accounts, particularly among Medicare recipients and other underserved groups, present a future revenue growth catalyst by significantly increasing the total addressable market.
  
• HealthEquity's strategy to exploit opportunities in adjacent markets, such as through possible acquisitions, could bolster long-term revenue and earnings growth by expanding its service offerings and customer base.
  
• The continued development and implementation of new technologies and integrated partnerships are set to enhance operational efficiencies, potentially leading to margin expansion and higher earnings.

HealthEquity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HealthEquity's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.4% today to 17.6% in 3 years time.
• Analysts expect earnings to reach $292.5 million (and earnings per share of $3.28) by about December 2027, up from $96.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $174.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.9x on those 2027 earnings, down from 81.6x today. This future PE is greater than the current PE for the US Healthcare industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

HealthEquity Future Earnings Per Share Growth

Risks

• HealthEquity has faced significant excess service costs, increasing operational expenses due to sophisticated fraud activities and large-scale operational changes, which could negatively impact net margins.
  
• The reliance on forward interest rate curves for custodial revenue guidance and uncertainties in forecasting average HSA cash pose risks to accurately predicting future earnings and revenue.
  
• There could be potential attrition in customer accounts, particularly in lower-margin CDB products following price increases, which may affect overall growth and revenues.
  
• The guidance for fiscal 2026 appears slightly conservative with potential uncertainties in the market, particularly regarding contributions, spending patterns, and interest rate changes, which could impact revenue predictions.
  
• HealthEquity has large amounts of HSA assets maturing in the coming years, which introduces risk related to future reinvestment rates and potential impacts on revenue if interest rate assumptions are incorrect.

Valuation

• The analysts have a consensus price target of $113.0 for HealthEquity 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 $130.0, and the most bearish reporting a price target of just $102.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.7 billion, earnings will come to $292.5 million, and it would be trading on a PE ratio of 40.9x, assuming you use a discount rate of 5.9%.
• Given the current share price of $91.09, the analyst's price target of $113.0 is 19.4% 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.