HealthEquity Inc. (HQY) was not immune to the market wide sell-off in equities during the fourth quarter of 2018 which disproportionally impacted growth stocks with high price-to-earnings multiples. The market quickly lost its appetite for these richly valued high-growth stocks with steep valuations. Health Equity’s rich valuation became a concern to me during the fourth quarter as its growth albeit double-digits, did not justify its sky-high valuation. This concern prompted me to write a piece discussing this concern and warned that the “current valuation is rich in an already frothy market thus caution at these levels is wise” prior to the stock selling off from $101 to $47 shedding 53% of its market value during the fourth quarter of 2018. The company continues to post quarter after quarter of double-digit growth in revenue and EPS without any debt on the balance sheet thus has been rewarded with a rich valuation as a function of its impressive growth and total addressable market. This high price-to-earnings multiple came under fire as the market moved into a risk-averse environment in the fourth quarter. As high-flying equities came down in the broader market sell-off, Health Equity lost over half of its market capitalization and erased all of its gains in 2018. Now that the market correction has passed and the company continues to post great quarterly growth along with enhancing its growth profile, the valuation is now compelling moving into its Q4 earnings and the stock is still well off its highs for a long-term investment.
Addressable Market and Market Position
On the fundamental level, the company is an intermediary servicing the secular growth Health Savings Account (HSA) space that’s largely independent of legislative actions, drug pricing, rising insurance costs while not playing any role in the pharmaceutical supply chain. The company manages funds allocated for medical, dental and vision expenses that are deducted on a pre-tax basis and deposited into a dedicated HSA account. The HSA space has grown in popularity as corporate adoption has allowed access to these plans in conjunction with consumer awareness. Continue reading "HealthEquity - Compelling Buy Heading Into Q4 Earnings"