CVS - Accolade: Recent Quarter Demonstrates Strong Momentum

Summary

• The US healthcare system is hard to navigate.
• ACCD's strong competitive advantage is its proprietary platform.
• 3Q23 demonstrated solid bookings and growth.

Investment thesis

I recommend going long Accolade ( ACCD ). The challenges faced by individuals navigating the healthcare system, such as confusion regarding coverage and delayed medical attention, result in increased costs for both individuals and businesses. ACCD aims to address these issues by utilizing proprietary technology and health assistants to engage members and provide personalized care, resulting in improved health outcomes and decreased healthcare costs for businesses. I expect ACCD to continue growing at a healthy rate moving forward, albeit a small deceleration due to a weak macro backdrop in FY24.

Business overview

In order to assist individuals in making the most of their healthcare and workplace benefits, ACCD offers customized, tech-enabled solutions. The majority of ACCD's clientele are businesses that use Accolade to create a centralized hub for all employee and family healthcare, insurance, and benefits information and management.

Healthcare system is hard to navigate

The service that ACCD provides aids its members in overcoming many of the obstacles they face when attempting to use the healthcare system as a whole. To begin, many Americans still find it challenging and confusing to work their way through the healthcare system. Because of this, many customers are confused about their health care coverage and bills. Although problems with the healthcare system are a problem in and of themselves, they can have more direct, material effects as well. One survey found that 27% of US adults delayed seeking medical attention due to uncertainty about whether or not it would be covered by their insurance. Lack of early diagnosis of illness can lead to unmet medical needs and higher costs for businesses.

The difficulty has been compounded by the continued shift of healthcare costs onto individuals . Deductibles have also increased steadily over time, typically doubling in the past decade . ACCD has demonstrated that it can assist to lower these expenses, which in turn saves money for both members and employers. These cost reductions have been achieved in large part due to the active participation of ACCD's membership. A majority of ACCD's membership actively participates in its activities on a regular basis, especially in family engagement of more than 70%.

ACCD proprietary platform advantage

In my opinion, the secret to ACCD's success lies in the synergy between the platform's proprietary technology and health assistants, which together produce greater levels of engagement. Health Assistants and clinicians can gain useful information about their patients from ACCD's InView platform. InView is a member-centric customer relationship management application that integrates and synthesizes disparate data sources to paint a comprehensive picture of each individual member. Using InView, ACCD Health Assistants can assess a client's needs, provide individualized care, and ascertain when clinical intervention is warranted. Accolade uses this technology-enabled service offering to communicate with all of an employer's members, not just those who file expensive claims.

Employee engagement can take many forms, from providing information about free flu shots and annual checkups to helping staff find cheaper alternatives to name-brand medications. In recent years, ACCD has maintained a very active membership base (as shown above). It's one of ACCD's selling points, in my opinion, because most competitors focus on recruiting people who have already shown interest in their benefits and healthcare. ACCD's goal is to get its members to take advantage of their health insurance in order to prevent illness and treat it early, when it's more manageable. An example of this would be a member who follows ACCD Health Assistant's advice and undergoes routine checkups, during which the early warning signs of diabetes are discovered. The advice to get annual checkups allowed the member to learn about ways to improve their lifestyle and reduce the risk of developing diabetes. Their Accolade care team also provided them with supplementary materials and instructions to help them maintain their progress and avoid relapse. As a result of a recommendation by ACCD, the member increased their use of health and benefit services, which had a positive effect on their health by reducing their risk of diabetes. Consequently, this helped the member and the employer save money on healthcare by avoiding the high costs associated with diabetes.

In a nutshell, when customers invest in ACCD, they see improved health outcomes for their employees, which translates to lower healthcare costs for the business. All of this is made possible by ACCD's enhanced participation and streamlined benefits and healthcare navigation.

Competition

ACCD faces competition from larger payors like CVS Health Corp ( CVS ) and Cigna Corp. ( CI ). Some of these players, such as CI with its "Cigna One Guide," go above and beyond the call of duty to provide a more white-glove experience in addition to the standard benefits support they provide. Although larger insurers have more financial resources and more established relationships with employers, I think an independent player like ACCD's has some unique benefits. Some people, for instance, may have an innate bias against their health insurance provider, which could make them less receptive to a payor-backed offering or the advice it provides. ACCD's independence means it can serve all employees regardless of which carrier they use, which may be difficult for a payor-backed offering. Last but not least, ACCD's independence means that it can keep serving clients even if they switch health insurance providers, which is a common occurrence for both employees and businesses.

3Q23 solid bookings growth and strong FY24 guidance

This was another prosperous quarter for ACCD, with record bookings. ExpertMD and the virtual primary care markets are reportedly expanding rapidly due to rising interest from payers.

According to ACCD, their services stand out due to their attention to social determinants of health and their ability to guide patients through the entire healthcare journey.

In addition, ACCD projected $410 million in revenue for FY24 and an EBITDA margin of -5% to -7%. However, management is upbeat about the company's direction and optimistic about its eventual profitability, which it predicts will be reached in the second half of 25. While the company has fared well during the downturn, I think the current macro challenges call for a more conservative approach to position sizing.

Management has stated that acquiring new government contracts is not a part of the guidance they provide. That's why any additional funding would be a good thing if they can get it.

Valuation

My model suggests ACCD is worth $11.47, if it trades at 1.7x forward revenue multiple in FY24.

Model walkthrough:

1. Revenue to follow management full year guidance in FY23 and preliminary guidance for FY24. Revenue growth should remain at a high level moving forward given compelling value proposition, which should allow ACCD to capture share
2. As I mentioned above regarding near-term macro headwinds, I believe the valuation would stay at this level for the time being.

Risks

Earnings volatility

Although Accolade's revenue is highly transparent, there is some uncertainty due to the variable nature of the contracts the company enters into. Two-thirds of the variable fee comes from the customer's realized savings on healthcare spending, and one-third comes from Accolade's achievement of a specific performance metric. Accolade has a solid performance record, but a slip in execution could significantly affect the stock price.

Rising rates impacting valuation

Since ACCD is not currently profitable and is not expected to become profitable soon, an increase in interest rates may change the current valuation methodology. The discounted cashflow value of ACCD is affected by the discount rate attached to its long-term cash flow.

Conclusion

ACCD helps businesses and individuals navigate the healthcare system by offering them personalized and technology-enabled solutions, with a main focus on employees' healthcare and benefits information and management. By using their platform, Accolade, and the support of their health assistants, ACCD is able to improve the members' understanding of their coverage and lower the costs for the employer. In short, ACCD is providing a much-needed service to a very confusing and complex industry and have a loyal customer base that are actively engaging with their program.

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