HealthEquity: Buy This Thriving Health Saving Account Administrator Despite The Challenging Low-Interest Environment

Summary

• HealthEquity is the leading health saving account administrator that is barely reaching its potential.
• HealthEquity posted great Q2 FY20 results. Operation and financial KPIs improved substantially, outpacing peers in the market.
• The integration with WageWorks is progressing rapidly, a year ahead of schedule. Management expects recurring synergies to increase by $30M to $80M over the next 18 months.
• HealthEquity expects to end FY 2020 with $725M in revenue, a 36% increase YoY, and $231M adjusted EBITDA, or 31% margin.
• While the valuation is high at 40x P/E, the growth runway is long and vast, and HealthEquity is in the best position to capture the largest share of the market.

Investment thesis

HealthEquity (NASDAQ:HQY) is a technology, finance, and healthcare company, all-in-one. The company runs like a wealth management fund where users top up their money (and employer matching) into a saving account that they can use to pay for their healthcare bills in a tax-efficient manner.

Our thesis is simple. HealthEquity generates revenue through growing users' saving accounts. Therefore, as long as people (and employers) keep putting away some money for their healthcare bills, HealthEquity benefits.

As a comforting point to note, last year, HealthEquity acquired its competitor, WageWorks, allowing it to gain dominant market share instantly. Furthermore, the market is still in the early innings of growth. Thus, we are convinced that HealthEquity will be able to capture the tremendous growth that the market has to offer.

Excellent Q2 FY2020 results

Financial metrics

Source

• Revenue was $176.0 million, an increase of 103% compared to $86.6 million in Q2 FY19.
• Gross profit was $101.7M, gross margin of 58%.
• Net profit was $9M, net margin of 5%.
• Adjusted EBITDA was $60.0 million, an increase of 48% compared to $40.6 million in Q2 FY19.

Operation metrics

Source

• 5.4 million HSAs, an increase of 29% compared to Q2 FY19. (13% organic growth excluding WageWorks)
• $12.2 billion Total HSA Assets, an increase of 43% compared to Q2 FY19. (25% organic growth excluding WageWorks)
• 12.5 million Total Accounts, including both HSAs and complementary consumer-directed benefit ("CDB") accounts, an increase of 158% compared to Q2 FY19.

Overall, HealthEquity delivered solid top and bottom-line results. Revenue was up 103%, and Adjusted EBITDA was up 48%. Meanwhile, gross and net margins remained stable at 58% and 5%. Considering we are in a low-interest-rate environment, these numbers show great promise for even bigger future profitability.

What is more impressive is that even during the darkest day

Analyst’s Disclosure:I am/we are long HQY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.