Rising Patient Financial Responsibility May Pressure Margins Yet Support Long-Term Healthcare Platform Demand

Catalysts

About Phreesia

Phreesia provides digital intake, payments and engagement solutions that connect patients, providers and life sciences companies across the care journey.

What are the underlying business or industry changes driving this perspective?

• Although the AccessOne acquisition positions Phreesia to address rising patient financial responsibility and providers’ need to convert receivables into cash, integration complexity and the need to retool the product for the broader client base could delay cross-sell momentum and temper revenue growth and contribution to net income.
• While expanding into provider financing taps a large and growing need for liquidity amid declining days cash on hand at hospitals, reliance on a mix of funded and unfunded models and a cost base that can reach 75 percent of revenue may cap take-rate economics and slow margin expansion.
• Although the multibillion-dollar HCP digital marketing opportunity and Phreesia's embedded workflow presence create a differentiated position, regulatory fluidity around direct-to-consumer and promotional practices could elongate selling cycles and constrain Network Solutions revenue growth.
• While Phreesia's ability to orchestrate coordinated patient and provider engagement at the point of care should support higher revenue per AHSC, pharma and provider budgets that reset annually and remain cautious could limit upsell velocity and restrain overall revenue and earnings growth.
• Although management targets double-digit revenue-per-AHSC growth with new AI and HCP offerings layered on a stable base, the need to keep investing in sales, marketing and R&D to support these initiatives may offset operating leverage and slow further improvement in adjusted EBITDA margins.

Assumptions

This narrative explores a more pessimistic perspective on Phreesia compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Phreesia's revenue will grow by 11.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.2% today to 6.4% in 3 years time.
• The bearish analysts expect earnings to reach $41.0 million (and earnings per share of $0.62) by about December 2028, up from $-5.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $113.4 million.
• 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 48.3x on those 2028 earnings, up from -183.9x today. This future PE is lower than the current PE for the US Healthcare Services industry at 55.5x.
• The bearish analysts expect the number of shares outstanding to grow by 2.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The AccessOne acquisition requires product retooling and significant go to market investment before it can be broadly sold into Phreesia's existing client base. This could delay the realization of this new growth lever and pressure revenue growth and adjusted EBITDA margins if costs ramp faster than adoption.
• Network Solutions, particularly DTC focused pharma marketing, is exposed to regulatory and political uncertainty around pharmaceutical promotion and consumer data use. This fluidity is already leading management to take a more measured outlook, which could slow Network Solutions revenue growth and limit operating leverage.
• Provider financing economics depend on funded and unfunded models where operating costs can consume 65 to 75 percent of revenue and the health care provider retains most of the credit risk. This may cap Phreesia's take rates and constrain long term net margin expansion even if portfolio volumes grow.
• The strategy hinges on sustained double digit growth in revenue per AHSC and mid single digit AHSC growth driven by new AI, HCP marketing and voice based offerings. If providers and life sciences clients moderate technology and marketing spend through the cycle, that would dampen revenue growth and earnings progression.
• The decision to finance the largest acquisition in company history with a 110 million secured bridge loan to be refinanced into longer term debt increases financial leverage. If macro conditions tighten or cash generation underperforms expectations, higher interest costs and refinancing risk could weigh on net income and free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Phreesia is $24.0, which represents up to two standard deviations below the consensus price target of $29.82. This valuation is based on what can be assumed as the expectations of Phreesia'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 $35.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $643.3 million, earnings will come to $41.0 million, and it would be trading on a PE ratio of 48.3x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $16.41, the analyst price target of $24.0 is 31.6% 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.