Expanding HSA Market Dominance Fuels Revenue And Innovates Healthcare Financial Services

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

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

• 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

• 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 16.4% in 3 years time.
• Analysts expect earnings to reach $254.3 million (and earnings per share of $2.54) by about November 2027, up from $105.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $281.3 million in earnings, and the most bearish expecting $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 48.4x on those 2027 earnings, down from 82.8x today. This future PE is greater than the current PE for the US Healthcare industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 4.69% 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.

Risks

• 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

• The analysts have a consensus price target of $103.62 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 $1.5 billion, earnings will come to $254.3 million, and it would be trading on a PE ratio of 48.4x, assuming you use a discount rate of 5.9%.
• Given the current share price of $100.2, the analyst's price target of $103.62 is 3.3% higher. 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.