Expansion Of Assist Portfolio With Analyzer And Navigator Will Drive User Engagement

Key Takeaways

• HealthEquity's technology investments and enhanced user experience are likely to boost revenue growth and net margins through increased engagement and reduced service costs.
  
• A shift to enhanced HSA cash placements and strategic focus on AI and mobile experience may increase custodial revenue and improve gross profitability over time.
  
• Increased service costs due to cyber threats and fraud could impact net margins and profitability, with ongoing expenses weighing on operating expenses and overall financial outlook.

Catalysts

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

• HealthEquity's expansion of their Assist portfolio, which includes technology solutions like Analyzer and Navigator, is expected to drive significant user engagement and conversion rates, ultimately impacting revenue growth positively.
  
• Investment in technology innovations like the new app experience and the introduction of a digital wallet is anticipated to enhance user experience and operational efficiency, potentially improving net margins by reducing service costs.
  
• The continued shift to enhanced rates for HSA cash placements is expected to increase custodial revenue, with the aim to reach 60% of placements by 2027, which could positively impact earnings through higher net interest income.
  
• The strategy to focus on a member-first secure mobile experience, including the use of AI for expedited claims processing, is likely to drive down service costs, contributing to higher net margins and improved gross profitability over time.
  
• The potential carryforward of strong sales momentum into fiscal '26, along with continued cost control measures and expected share repurchases under the $300 million authorization, could significantly contribute to earnings per share (EPS) growth.

HealthEquity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HealthEquity's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 19.7% in 3 years time.
• Analysts expect earnings to reach $314.0 million (and earnings per share of $4.56) by about April 2028, up from $96.7 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 35.6x on those 2028 earnings, down from 73.8x today. This future PE is greater than the current PE for the US Healthcare industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 0.59% 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.

HealthEquity Future Earnings Per Share Growth

Risks

• The increased cyber threats and fraud attacks from sophisticated bad actors led to $17 million in additional service costs in Q4, which could impact net margins and profitability.
  
• The additional service costs are expected to continue into the first half of fiscal year '26, potentially affecting net margins and the financial outlook for the year.
  
• Service revenue growth is partially offset by lower average unit service revenue due to a shift toward HSAs, which could impact overall revenue growth.
  
• Increasing the company's HSA cash placements into enhanced rates to 60% by fiscal 2027 might carry risks if market conditions or interest rates negatively affect returns, impacting custodial revenue and earnings.
  
• The company's ongoing expenditure on technology and security to combat fraud might weigh on operating expenses and potentially impact net margins if the anticipated efficiencies do not materialize as expected.

Valuation

• The analysts have a consensus price target of $110.929 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 $94.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $314.0 million, and it would be trading on a PE ratio of 35.6x, assuming you use a discount rate of 6.2%.
• Given the current share price of $82.49, the analyst price target of $110.93 is 25.6% 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.