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Expanding HSA Market Dominance Fuels Revenue And Innovates Healthcare Financial Services

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WarrenAINot Invested
Based on Analyst Price Targets

Published

September 12 2024

Updated

October 02 2024

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Key Takeaways

  • HealthEquity's expansion in the HSA market and strategic acquisitions, including BenefitWallet, aim to grow its customer base and custodial revenue.
  • Investments in technology and the introduction of health payment accounts (HPAs) are designed to enhance operational efficiency and diversify revenue streams.
  • Reliance on new HSA asset inflows and a volatile job market, coupled with cybersecurity risks, could challenge HealthEquity's revenue sustainability and net income margins.

Catalysts

About HealthEquity
    Provides technology-enabled services platforms to consumers and employers in the United States.
What are the underlying business or industry changes driving this perspective?
  • The company's focus on expanding its position in the HSA market, marked by a significant 15% year-over-year growth in HSA members, is likely to bolster customer base and drive revenue growth.
  • HealthEquity's strategic acquisitions, such as the final tranche of BenefitWallet, adding approximately 216,000 HSAs and $1.0 billion in HSA assets, are expected to enhance its market share and improve custodial revenue. This move also locks in strong custodial yields, which positively affects net interest margins.
  • Significant technological investments, including the launch of a new mobile app and card processor migration, are set to improve operational efficiency and user experience. This operational leverage could result in higher net margins due to lowered service expenses against account growth.
  • The introduction of health payment accounts (HPAs) with no interest and no fee options signals an innovative approach to broadening product offerings and tapping into new revenue streams, potentially improving service revenue.
  • The completion of a $300 million share repurchase authorization reflects strong cash flow generation and financial health, which may contribute to earnings per share (EPS) growth through reduced share count.

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming HealthEquity's revenue will grow by 12.1% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 9.6% today to 16.9% in 3 years time.
  • Analysts expect earnings to reach $262.0 million (and earnings per share of $2.57) by about October 2027, up from $105.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $163.5 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.3x on those 2027 earnings, down from 66.3x today. This future PE is greater than the current PE for the US Healthcare industry at 25.1x.
  • Analysts expect the number of shares outstanding to grow by 1.98% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • The reliance on new asset inflows for enhanced rate product growth may challenge revenue sustainability if the influx of new HSA assets slows down.
  • Increased expenses related to hiring and tech development to meet back-end projects could reduce net income margins in the latter half of the fiscal year.
  • A potential softening job market could lead to decreased employer contributions and new HSA accounts, impacting HSA asset growth and service revenue.
  • Interest rate volatility and the phased approach to moving HSA cash to enhanced rates could cause fluctuations in custodial revenue, making financial outcomes less predictable.
  • Cybersecurity incidents, like the one disclosed, could erode client trust and lead to increased operational costs for mitigation and prevention, impacting net income.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $104.07 for HealthEquity based on their expectations of its future earnings growth, profit margins and other risk factors.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.6 billion, earnings will come to $262.0 million, and it would be trading on a PE ratio of 43.3x, assuming you use a discount rate of 5.8%.
  • Given the current share price of $80.27, the analyst's price target of $104.07 is 22.9% 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Fair Value
US$104.1
20.2% undervalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture0500m1b2b20142016201820202022202420262027Revenue US$1.6bEarnings US$262.0m
% p.a.
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Current revenue growth rate
11.46%
Healthcare Services revenue growth rate
0.25%
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