Direct Primary Care And Telehealth Expansion Will Transform HSA Marketplace

Key Takeaways

• Regulatory changes and digital innovation are driving significant market expansion, operational efficiencies, and improved member engagement for long-term growth and higher margins.
  
• Diversified revenue streams and strong client retention underpin stability, positioning the company to outpace the broader market despite challenging macro conditions.
  
• Sluggish labor market, interest rate dependency, healthcare cost pressures, rising competition, and elevated investments threaten revenue growth, margins, and account profitability.

Catalysts

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

• The recent regulatory expansion-allowing direct primary care, pre-deductible telehealth, and millions of new ACA bronze/catastrophic plan members to qualify for HSAs-creates the largest addressable market increase in two decades, poised to accelerate new account openings and AUM growth, meaningfully boosting future revenue.
  
• HealthEquity is leveraging digital transformation through its secure, AI-powered mobile app and automation initiatives, enhancing member experience and engagement while driving operating leverage and reducing service costs, supporting higher net margins and improved earnings over time.
  
• Despite a soft macro labor environment, HealthEquity has demonstrated robust enterprise wins, retention, and a growing SMB client base, showing resilience and ability to outpace broader market growth, which should underpin revenue stability and potential share gains within a structurally expanding HSA marketplace.
  
• Ongoing investments in fraud prevention and transition to a fully cloud-based platform have already reduced service costs and fraud-related expenses. This progress, along with further anticipated AI-driven efficiencies, sets the stage for a structurally lower cost base and margin expansion.
  
• Diversification of revenue streams-including fast-growing custodial yield, interchange fees, and ancillary administrative services-mitigates reliance on any single income source and increases resilience, supporting smoother top-line growth and greater stability in net income as industry secular tailwinds persist.

HealthEquity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HealthEquity's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 20.0% in 3 years time.
• Analysts expect earnings to reach $320.2 million (and earnings per share of $3.38) by about September 2028, up from $145.8 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 38.6x on those 2028 earnings, down from 56.6x today. This future PE is greater than the current PE for the US Healthcare industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

HealthEquity Future Earnings Per Share Growth

Risks

• A continued slowdown in the labor market and weak employment growth could limit HealthEquity's ability to add new HSA accounts, placing downward pressure on long-term revenue and account growth.
  
• Heavy reliance on interest income from custodial cash exposes HealthEquity to earnings volatility if interest rates decline, as lower yields on HSA deposits would compress net margins and operating income, particularly once current rate hedges roll off.
  
• Persistent healthcare inflation and wage stagnation may reduce the amount consumers are able to contribute to their HSAs, lowering average account balances and transactional fee revenue, and impacting overall profitability.
  
• Ongoing investments in technology, fraud prevention, and marketing to support new product offerings and regulatory expansions could lead to higher operating costs; if new member growth or engagement fails to materialize at projected rates, this would pressure margins and earnings.
  
• Increasing competition from fintechs, traditional banks, and other HSA administrators entering the market may lead to fee compression and require increased customer acquisition spend, negatively affecting revenue growth and net margin expansion in the long term.

Valuation

• The analysts have a consensus price target of $122.214 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 $134.0, and the most bearish reporting a price target of just $108.0.
  
• 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 $320.2 million, and it would be trading on a PE ratio of 38.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $95.54, the analyst price target of $122.21 is 21.8% 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.