HealthEquity (NASDAQ:HQY) is a fintech company that acts as an administrator of health savings accounts. It’s the largest HSA custodian in the United States and has seen its stock price move rapidly upward over the last five years as these plans became more popular.
That run, however, has abruptly reversed in recent weeks. In the last month alone, HQY shares are down over 20 percent. Why did HealthEquity stock fall so much, and could the stock be a good buy in anticipation of a rebound?
Why Did HealthEquity Stock Fall?
The explanation for HQY’s decline is tied closely to its call following the release of its Q4 earnings report. Management revealed that it had seen its gross profit reduced by about $17 million due to a combination of cyber threats and fraud leading to a miss versus EPS expectations. Analysts had previously forecast HQY would report $0.71 per share, but it was only able to deliver $0.69.
A negative blip occurred last year when management disclosed a massive data breach last July, a fact that may explain part of why investors were so sensitive to the rising costs being put on HealthEquity by cyberattacks. In that breach, personal information from about 4.3 million of the company’s customers was exposed.
HealthEquity has also been caught up in a general stock market selloff. As a high-growth fintech stock, HQY is one of the stocks most affected by the potential for a general economic slowdown. A period of stronger economic headwinds ahead is likely to result in fewer Americans opening new savings instruments like HSAs or reduce the amount they are able to contribute to them.
1.2 Billion Reasons to Buy HealthEquity
Although the costs being put on HealthEquity by cyber criminals are deeply worrying, the company’s Q4 report was generally quite positive.
Revenues last year rose by 20% to $1.2 billion, while Q4 revenue rose 19 percent. HealthEquity also ended the year with 17.0 million total accounts, an increase of 9 percent from the year before. The number of HSAs increased 14 percent to 9.9 million.
Although EPS missed analyst expectations, HealthEquity is also still doing quite well in terms of its net income, which rose 74% for the full FY 2024 to $96.7 million. Non-GAAP net income, meanwhile, rose by 42% and hit $277.3 million.
HealthEquity also drew down its cash holdings while incurring more debt in 2024. At the end of the previous year, the company had a $404.0 million reserve and debts of $875.0 million. As of the end of last year, the cash had been reduced to $295.9 million while debt rose to $1.06 billion.
How Much Room Does HealthEquity Have for Growth?
Despite the concerning results in Q4, HealthEquity may very well be in for better times ahead. HSAs have become increasingly popular in recent years as consumers and businesses look for ways to deal with the rising cost of healthcare. According to the Consumer Financial Protection Bureau, total assets in HSAs increased by over 500 percent between 2013 and 2023 alone.
HSAs may also get a boost from government policy. Although nothing concrete has come of it yet, there has been some talk of the Trump administration expanding HSA availability.
If government support for HSAs firms up, the plans are likely to see an explosion of growth similar to what 401(k) plans experienced after 1981 when a change to IRS rules allowed employees to pay into the plans via payroll deductions.
As was the case with 401(k)s, the companies that lead the field in offering HSAs could profit handsomely if government policy further encourages use of the plans.
The expectations analysts have for HealthEquity’s earnings growth seem to reflect the assumption that HSAs will continue to grow in popularity. Over the next five years, analysts predict that the company will continue to raise its EPS by over 20% annually. As a leader in a fast-growing financial product market, it’s far from difficult to see HealthEquity meeting this goal in spite of its current challenges.
HQY’s Mixed Valuation
HQY is a bit of a mixed bag from a valuation perspective, though analysts still appear to believe that the stock has a decent amount of upside left in it.
Right now, the company’s shares trade at 77.9x trailing 12-month earnings, a multiple that would typically suggest considerable overvaluation. It’s worth noting, though, that the price-to-sales and price-to-book ratios are quite a bit more reasonable at 6.3 and 3.5, respectively.
Analysts price forecasts give HQY an average target price of $114.36. If the stock can reach this price, it will return almost 35% against its most recent price of $84.88. It’s also worth acknowledging that the lowest price target is $98, which would still give HQY an upside of over 15 percent.
At the end of the day, HQY’s valuation will likely depend a great deal on its ability to produce the kind of EPS growth currently expected from it. If it can exceed 20 percent earnings growth over the next five years as expected, the stock could prove to be fairly valued. If its growth stagnates, however, it’s likely that the stock’s high P/E ratio could give it additional room to move downward.
Is HQY a Stock to Buy on the Dip?
There’s no doubt that HealthEquity’s revelation of cyber threats and fraud in Q4 is a concern, especially given how much it affected the company’s bottom line. With that said, the company still appears to be performing quite well and is in a strong position within a fast-growing market.
HSA growth doesn’t seem to be declining, and if there’s one stock tethered to its growth HealthEquity seems to be it. So for those with a long-term outlook who can tolerate the volatility swings, it’s got a lot going for it.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
