Athenahealth: Not Going Away Quietly

Mar. 6.11 | About: athenahealth, Inc. (ATHN)

Athenahealth (NASDAQ:ATHN) took a major hit in 2010 when the company got rocked by an accounting scandal. Shares dropped from $47 to $21 in the matter of months because it was alleged they issued misrepresentations to the market that artificially inflated the equity value back in late 2009 and early 2010. Since those dark days the stock has clawed its way back to the $45 range because of its position as an up and comer in two market segments that are currently on fire. Those two particulars are cloud computing and electronic healthcare information systems, both poised to grow exponentially in the next five years.

With a 2011 P/E ratio of 58 and a PEG ratio (price/earnings/growth) of 1.8, Athenahealth is a bit out of my comfort zone (based on mean Yahoo Finance analyst estimates). Apparently a majority of the analysts don't have that much of a confidence level in the stock either because out of the 24 analysts that cover it, only 7 have a buy or strong buy rating while the majority of the remainder have issued a hold on it, and, three give it an underperform or sell. Athenahealth isn't bulletproof, no stock is, but I am wondering why so many analysts have a hold rating on it with a PEG ratio of only 1.8 which isn't too out of the ordinary with a company experiencing such a high growth rate of 33%. A closer look is warranted.

Athenahealth is one of the few pure plays in the cloud computing space residing within the exploding electronic healthcare information systems industry. Its flagship offering is athenaCollector that automates billing functions for physicians and ensures they get paid faster and at a higher rate. A newer product, athenaClinicals, automates and manages medical record functions, and this product is where the real growth is. In a recent ratings report, they state:

Only 10% of US hospitals have implemented HIT (healthcare IT) while 16% of primary care physicians have adopted EHRs (electronic health records)....The EHR market, estimated to be around $1.2 billion, is expected to surge 400% in the next 8 years.

The catalyst for this billowing growth isn't unbridled demand from the free market economy, but government intervention from the American Recovery and Reinvestment Act of 2009, aka, the stimulus plan. Part of the stimulus plan is the HITECH (Health Information for Economic and Clinical Health) Act where nearly $30 billion has been slotted for the increase in use of electronic health records by hospitals and physicians.

The goal of the HITECH Act, as reported by ALN Medical Management, is to:

...rapidly increase EHR adoption to 90 percent for physicians and 70 percent for hospitals by 2019.

Under the plan, each physician would receive up to $64,000 in the form of government incentive payments for those who comply with the HITECH Act. Reimbursement starts in January of 2011.

In Athenahealth's February 18, 2011 conference call, CEO Jonathan Bush comments:

The reason that the HITECH Act hurt us, if it hurt us at all, would be the fact that lots of people made big decisions about their practice without first learning about Athenahealth.

I don't like to stereotype people or professions, but physicians tend to be smart, well informed and networked for the most part. I would assume that a majority of them would be familiar with the significant players in the EHR space from either following the stock market, recommendations from colleagues or the sales departments of the Healthcare IT companies which include Athenahealth.

Earlier in the conference call, CEO Bush stated that they were ramping up the sales force during the first quarter of 2011 which should propel revenues higher. This may moderate the stock's upside in the short-term because of the added SG&A expenses, but in the long run, it should pad Atheahealth's coffers.

In its most recent 10-K, they discuss the competition:

Other nationwide competitors have begun introducing services they refer to as 'on-demand' or 'software-as-a-service' models, under which software is centrally hosted and services are provided from central locations.

I believe this is a plus for Athenahealth because other HIT vendors are playing catch-up to their first-mover advantage. Athenahealth was founded in 1997 and has a 14 year head start in cloud computing and I believe that prospective clients would consider this a positive when deciding on who would be the best suited software provider for them. This could be especially true for individual physicians who may opt for cloud computing because no IT department is required to host, maintain and update the software. All you need is a browser and a broadband connection.

As far as both large and small hospitals with conventional legacy software systems, Athenahealth has an answer for that - Microsoft (NASDAQ:MSFT). The two companies have a new partnership that connects Athenahealth's cloud based services with Microsoft's Amalga platform which is an enterprise health intelligence platform that collects data from disparate IT systems. This levels the playing field for Athenahealth and puts them on flat footing when vying for market share with more established enterprise HIT providers. They are in a great position to take advantage of the HITECH Act and all that it offers for revenue and earnings growth in the next five years.

So what don't all of these analysts like about Athenahealth? I really can't figure that out, but can only surmise that it's from a valuation perspective. As a momentum investor, I wouldn't think that its PEG ratio of 1.8 would make you hyperventilate, maybe make your palms sweaty, but that's the nature of momentum investing. I'm a value investor and believe that the market is due for a correction, so I'll let that scenario play out before I allocate my cash position. When and if that situation happens, I would think that Athenahealth would be a candidate for a trophy stock with ample upside potential. This company takes it to another level.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am short the market with inverse ETFs.