Athenahealth (ATHN) provides business services, primarily in the form of automated revenue collection, and reducing the administrative burden for healthcare providers. The company generates revenues by charging a percentage of collections (2-8% of the practice’s collections based on complexity). The company’s primary competition is the use of locally installed software. Nationwide competitors include Allscripts-Misys Healthcare Solutions, Inc. (MDRX) ; eClinicalWorks, LLC; GE Healthcare (GE) ; Quality Systems, Inc. (QSII) ; and Siemens Medical Solutions USA, Inc (SI) .
Part of the company’s research and development effort relies on learning from its established base of clients and applying best practices across its network. As a result, the company needs a large installed base to differentiate itself against other large competitors.
The key risks for the business fall into two major categories: regulatory risk and technology risk.
· Regulatory risk: The company’s revenues have benefited from a rapidly changing regulatory framework in the US. These changes have significantly increased the amount of paperwork generated by healthcare providers thus creating a greater need for a technology-based services provider such as ATHN. If regulations become less stringent, it could negatively affect revenues.
· Technology risk: The company regularly deploys software updates and improvements to clients via its cloud-based network. Any major data integrity problems that arise would tarnish its brand and slow adoption.
In 2013, the company’s sales grew 41% to $595.0 million from $422.3 million in the previous year driven primarily by the increase in the number of physicians and providers using the company’s services. However, EBITDA decreased 18% to $49.4 million from $60.3 million as the company incurred higher costs due to increased client claim volume processed on behalf of clients as well as transaction expenses (Epocrates in Q1 2013 and Arsenal on the Charles in Q2 2013) and higher employee compensation. EBITDA margin came in at 8.3%, 6 percentage points lower than prior year.
Using Thinknum’s discounted cash flow valuation tool, we can see that assuming that the company’s revenues increase 32% for each of the next 6 years with margins staying constant, the implied valuation is ~3bn or $84/share. This is 57% lower than the current share price of $195.04.
ATHN’s Forward P/E of 144.47 is significantly higher than an average of 27.48x for comparable companies (similar industry / growth trends): Allscripts Healthcare Solutions Inc., Quality Systems Inc., Synchronoss Technologies Inc., and Rackspace Hosting Inc.
While Athenahealth has seen impressive revenue growth over the past few years, a fundamental analysis of its projected cash flows indicates that its current valuation is rich. The market is likely baking in continued rapid growth in its customer base – a rate that will inevitably slow down as competition in this sector intensifies.