ACCD - Accolade: Multiples Should Rerate As ACCD Continues To Execute

2023-10-19 10:29:42 ET

Summary

• ACCD reported strong 2Q24 results, beating consensus estimates for revenue and adjusted EBITDA.
• Management's positive outlook on the demand environment and growing health plan channel support ACCD's growth prospects.
• Despite a contraction in multiples, ACCD's strong execution and potential for multiple rerating make it a buy.

Overview

My recommendation for Accolade (ACCD) is a buy rating. While multiples have revised downward by a great magnitude, leading to horrible share price returns, this is not an isolated dynamic for ACCD. In fact, ACCD continues to execute as guided and is on track to meet my growth estimates. As ACCD continues to execute, I expect valuations to rerate back to historical levels. Note that I previously rated a buy rating for ACCD in July as I expect growth to reaccelerate in FY25 and valuation to see a further premium vs. peers once that happens.

Recent results & updates

ACCD reported on October 4th 2Q24 revenue of $96.9 million and adjusted EBITDA of -$8.8 million, both beating consensus estimates. The primary drivers of the 10.5% growth in total revenue were the robust performance of both enterprise and consumer end-markets, as well as the early recognition of performance guarantees. The adjusted gross margin for ACCD was recorded at 44.2% due to the company's strategic investments in enhancing the front-line care team, which involved the implementation of enterprise virtual primary care capabilities. The decrease in operating expenses can be attributed primarily to lower sales and marketing expenditures. Consequently, the outperformance of adjusted EBITDA can be primarily attributed to the superior performance in both revenue and operating expenses. The enhanced adjusted EBITDA resulted in a non-GAAP EPS of -$0.22, surpassing the consensus estimate of -$0.407.

Management's upbeat comments on the demand environment, bolstered by GLP-1 interest and a growing health plan channel, give me reason to believe ACCD will continue to grow at the 13% rate I'd projected for the full year. Despite the fact that the annualized revenue for the first half of 2024 falls below my projected amount of $412 million, I do not perceive this as a significant concern due to the observed sales trend over the course of the year. Typically, 1Q is the first quarter of selling, which continues into Q2, so there is some ramp-up motion in 1H that should continue into 2H. The source of my optimism can be attributed to the observation made by management regarding a robust demand environment, wherein customers continue to make purchases for similar reasons as in the past. This indicates that the fundamental demand remains resilient. From my perspective, the growing GLP-1 interest should further support demand as employers are confronted with a pharmaceutical product that is contributing to the escalation of healthcare expenditures. This is an extremely positive dynamic for ACCD. ACCD can leverage the demand for GLP-1s to develop a more comprehensive assessment for its members, incorporating extended care strategies that encompass various aspects such as nutrition, mental health, and non-prescription alternatives. Put simply, an enhanced value proposition that allows ACCD to improve member retention and potentially increase average revenue per user [ARPU] in the long term.

One notable observation is that ACCD seems to be securing a significant number of business agreements. Notable transactions during the quarter encompassed successful acquisitions of expert medical opinion services by Nissan North America, Tyson Foods, Philips, TIAA, Spirit Airlines, Mutual of Omaha, and Clorox. Additionally, progress was made in establishing relationships with health plans in the field of advocacy. The management also observed that the activity of GLP-1 remained robust and constituted a significant proportion of total Plushcare visits, once again reaching double digits as a percentage. My confidence that FY24 will be able to meet my growth expectations is further cemented by management reiteration of their FY24 outlook, while reaffirming long term targets. For FY24, management reiterated revenue guidance of $410 million to $414 million.

From a profit perspective, management has done a good job so far in improving EBITDA margins to -25%, and management is confident that they will be able to reach positive territory in adjusted EBITDA (as guided within the range of 2 to 4%) in FY24. In my opinion, margins should continue expand as revenue grows given incremental EBTIDA margin is more than 20% since 2Q23.

Valuation and risk

According to my model, ACCD is valued at $9.29 in the base case and $19.17 in the bull case in FY24, representing a 30% and 168% increase, respectively. My growth estimates for ACCD have not changed since my previous model (which relies on management guidance that has proven to be accurate so far over the past 9 out of 10 quarters); what has changed are my estimates for the multiple that ACCD deserves to trade at. For background, ACCD was trading at near 3x when I last wrote about it, and multiple has contracted significantly to 1.6x since then. I view this revision as industry-driven rather than a dynamic isolated to ACCD. The results were encouraging, and ACCD is executing well in both the topline (beating consensus expectations) and EBITDA (which beat consensus too and is on track to improve as the cost structure improves). Despite this, ACCD multiple tracked down along with peers. As such, I believe that as ACCD continues to grow as guided and improve its EBITDA margin, it could possibly see multiples upside back to 3x in the bull case. In the base case, I expect ACCD to at least trade back to its historical premium (at 20%) as ACCD fundamentals have not weakened and has continued to execute as guided and better than consensus expectations vs. its peers' current multiple of 1.2x. ACCD is also expected to grow faster than peers over the next 2 years, who are expected to grow at 9% and 13% (12 months and 24 months forward). This implies to me ACCD should trade at 1.5x, translating to a price target of $9.29.

Risk

The healthcare industry could be severely impacted by the Biden administration's new proposed laws and regulations that enhances the protection of patient data. Since ACCD relies heavily on data collected from customers and members in order to operate, any legislation pertaining to data privacy is of particular importance.

Summary

In summary, I maintain a buy rating for ACCD based on its continued strong execution and the potential for multiple rerating. Despite a significant contraction in multiples, ACCD is performing well, beating consensus estimates in both revenue and EBITDA. Management's positive outlook on the demand environment, driven by factors like GLP-1 interest, bodes well for ACCD's growth prospects. The company's ability to secure new business agreements and expand its relationships with health plans further supports its growth potential.

While my growth estimates for ACCD remain unchanged, the contraction in its multiple has affected its valuation. However, as ACCD continues to execute and improve its EBITDA margin, I anticipate the possibility of multiples seeing an upside back to historical levels. This positions ACCD for potential price appreciation. In the base case, my price target for ACCD is $9.29.

For thesis monitoring, I would continue to track if ACCD ability to meet guidance and whether it is on track to meeting it's FY29 margin guidance.

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