HealthEquity Investors Score Big Today

Shares of HealthEquity (HQY) jumped 1.5 % during today's morning session, bringing their 52 week performance to 9.7%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company' growth prospects and market sentiment.

HealthEquity, Inc. provides technology-enabled services platforms to consumers and employers in the United States. The mid-cap Healthcare company is based in Draper, United States and has 3,688 full time employees.

HQY Has a Higher P/E Ratio Than the Sector Average

Compared to the Healthcare sector's average of 13.21, HealthEquity has a trailing twelve month price to earnings (P/E) ratio of -87.0 and an expected P/E ratio of 32.1. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-0.66 or forward earnings per share of $1.79.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since HealthEquity's P/E ratio is higher than its sector average of 13.21, we can deduce that the market is overvaluing the company's earnings.

HealthEquity Is Fairly Valued in Terms of Expected Growth

Another factor pointing to HealthEquity's value is its PEG ratio of 1.54. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.

HQY Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For HealthEquity, the P/B value is 2.6 while the average for the Healthcare sector is 4.07.

HQY's Weak Cash Flow Generation Is Troubling

The table below shows that HealthEquity is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in HealthEquity's case, free cash flow is growing at an average rate of -32.3% with a coefficient of variability of 66.7%. We can also see that cash flows from operations are evolving at a 14.4% rate, versus 117.2%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2022-01-31 141 -137 4 -95.38
2021-01-31 182 -97 85 34.51
2020-01-31 105 -42 63 -36.03
2019-01-31 113 -15 98 n/a

HealthEquity's Is a Profitable Business

If you are looking to make HQY a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively HealthEquity is run.

HealthEquity's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2022-01-31 757 333 56 -1.1
2021-01-31 734 318 56.62 -7.57
2020-01-31 532 206 61.26 -2.89
2019-01-31 287 106 63.08 n/a

HealthEquity's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2022-01-31 757 383 5.36 -50.87
2021-01-31 734 335 10.91 -46.81
2020-01-31 532 217 20.51 -24.15
2019-01-31 287 104 27.04 n/a

HealthEquity's cost of revenue is growing at a rate of 51.1% in contrast to 59.4% for operating expenses. Sales revenues, on the other hand, have experienced a 42.1% growth rate. As a result, the average gross margins growth is -3.9 and the average operating margins growth rate is -40.6, with coefficients of variability of 5.9% and 60.7% respectively.

HealthEquity Benefits From Positive Market Signals

The market sentiment regarding HealthEquity is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $101 to $68. HQY is trading -30.6% away from its target price of $82.85. 4.3% of the company's shares are tied to short positions, and 103.4% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Blackrock Inc. 9,690,500 2022-09-29 11% $556,137,789
Vanguard Group, Inc. (The) 8,173,889 2022-09-29 10% $469,099,484
Wasatch Advisors Inc 5,726,062 2022-09-29 7% $328,618,694
FMR, LLC 3,983,836 2022-09-29 5% $228,632,345
William Blair Investment Management, LLC 3,332,969 2022-09-29 4% $191,279,088
State Street Corporation 2,671,946 2022-09-29 3% $153,342,979
JP Morgan Chase & Company 2,151,210 2022-09-29 3% $123,457,940
Brown Advisory Inc. 2,059,396 2022-09-29 2% $118,188,735
ArrowMark Colorado Holdings LLC 1,983,563 2022-09-29 2% $113,836,679
Mackenzie Financial Corporation 1,891,751 2022-09-29 2% $108,567,588
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.