Budget Cuts And Data Rules Will Cripple Healthcare Margins

Key Takeaways

• Heavy reliance on volatile government funding, intensifying competition, and stricter data regulations threaten margins, scalability, and long-term revenue stability.
  
• Ongoing cash burn and lacking profitability raise concerns about future equity dilution and the company's ability to sustain growth.
  
• Expanding high-margin SaaS revenue, strong public-private partnerships, cost discipline, and AI-driven platform improvements are enhancing Amwell's profitability, market reach, and long-term growth prospects.

Catalysts

An enterprise platform and software company, delivers digitally enabling hybrid care in the United States and internationally.

• Government contracts, a major driver of platform revenue, are increasingly subject to budget restrictions and short-term renewals, as highlighted by the 2026 extension of the Military Health System contract that excluded key behavioral health and automated care programs due to fiscal constraints. This exposes future revenue growth to unpredictable contract scope reductions and a heavy reliance on the pace and priorities of public sector funding.
  
• Rapidly intensifying privacy concerns and more rigorous data protection regulations are likely to increase compliance costs and operational complexity, making it much more expensive to onboard new healthcare clients or launch additional digital health products, directly pressuring net margins and limiting scale efficiencies.
  
• Industry-wide commoditization of telehealth services combined with heightened competition from larger, better capitalized providers such as Teladoc, Amazon, and CVS Health will likely drive down pricing power and force American Well to accept lower platform fees, undermining gross margins and threatening long-term earnings potential.
  
• Slowing visit growth and declining average revenue per visit-down over 22 percent year-over-year with a further drop expected as non-recurring government software revenues fade-leave the company vulnerable to top-line stagnation as well as margin contraction, particularly as recurring SaaS revenues risk plateauing without broad-based patient adoption.
  
• Persistent negative adjusted EBITDA and ongoing cash burn, despite multiple cost-cutting rounds and declining R&D investment, raise concerns about the company's ability to achieve sustainable profitability. This increases the risk of future equity dilution if additional capital needs arise, constraining growth and placing significant pressure on future earnings per share.

American Well Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on American Well compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming American Well's revenue will decrease by 5.5% annually over the next 3 years.
• The bearish analysts are not forecasting that American Well will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate American Well's profit margin will increase from -46.2% to the average US Healthcare Services industry of 8.8% in 3 years.
• If American Well's profit margin were to converge on the industry average, you could expect earnings to reach $19.9 million (and earnings per share of $1.05) by about August 2028, up from $-124.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from -0.9x today. This future PE is lower than the current PE for the US Healthcare Services industry at 57.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

American Well Future Earnings Per Share Growth

Risks

• The growing mix of high-margin, recurring subscription software revenue-including substantial government contracts-positions Amwell to expand gross margins and drive more predictable earnings as SaaS becomes a larger component of top-line growth.
  
• Strong long-term partnerships, such as the extension with the Military Health System and new wins like Florida Blue, provide a foundation for expanding Amwell's footprint in both the public and private sectors, directly supporting future revenue growth and market share.
  
• The company's systematic execution on cost reduction initiatives-lowering R&D, sales and marketing, and G&A spending-demonstrates a pathway to improved profitability and the realistic achievement of positive cash flow from operations by 2026, which could translate into better net margins and investor confidence.
  
• Validated success in delivering scalable, integrated technology and rapid deployment across federal clients, including high satisfaction and increased utilization, may serve as a catalyst for deeper penetration into both government and commercial healthcare markets, increasing revenue opportunities and expansion potential.
  
• Investments in AI and platform integration that streamline client operations, improve clinical and financial outcomes, and enable fast addition of new care programs could enhance Amwell's competitive positioning, drive operational leverage, and ultimately support higher margins and sustainable long-term earnings growth.

Valuation

• The assumed bearish price target for American Well is $7.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of American Well's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $7.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $227.4 million, earnings will come to $19.9 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $7.19, the bearish analyst price target of $7.5 is 4.1% higher. The relatively low difference between the current share price and the analyst bearish 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.