2023-10-03 05:44:05 ET
Summary
- Accolade is in a good position to meet its revenue growth guidance for both the current fiscal year and long term.
- There is a risk that ACCD's bottom line could fall short of expectations in subsequent quarters, and investors might be concerned about Accolade's path to profitability for the long run.
- I rate ACCD stock as a Hold, following my evaluation of the company's revenue growth and profitability for the future.
Elevator Pitch
I assign a Hold investment rating to Accolade, Inc. ( ACCD ) stock.
Accolade deserves a Hold after taking into account its future growth and profitability. ACCD's growth outlook is favorable for both the near term and the long run, thanks to a high degree of recurring revenue and long-term demand drivers such as rising healthcare expenses. But Accolade's quarterly earnings could potentially miss expectations in certain periods when the company decides to invest at a faster pace. In addition, ACCD isn't expected to turn EBIT-positive by FY 2028 as per consensus estimates.
Business Overview
ACCD describes itself as a company offering "technology-enabled solutions that help people better understand, navigate, and utilize the healthcare system and their workplace benefits" in its FY 2023 (YE February) 10-K filing .
Accolade's Key Solutions
In the company's investor presentation slides , Accolade revealed that its client base has expanded from 15 in FY 2018 to over 800 by FY 2023. ACCD derived 78% and 22% of its revenue for the most recent fiscal year from access fees and utilization-based fees, respectively as indicated in its May 2023 Capital Markets Day presentation .
ACCD's Sales Breakdown By Offering
In the chart presented above, EMO refers to Expert Medical Opinions offered as part of Accolade's Expert MD solution.
Changes To Consensus Financial Forecasts
There are currently 16 Wall Street analysts covering Accolade's shares. The sell side is far more confident in ACCD's top line growth outlook, as opposed to expectations about the company's future profitability.
In the last three months, 15 of the 16 analysts raised their respective fiscal 2024 revenue projections for ACCD. A much fewer number of analysts, or 5 to be specific, revised their full-year bottom line estimates upwards during the same time period. None of the analysts lowered their FY 2024 top line or bottom line forecasts for the company in the past three months.
I touch on ACCD's future revenue growth and profit margin expectations in the next two sections of the current article.
Revenue Growth Prospects
My opinion of Accolade's top line expansion potential for the short term and long run is favorable.
In the near term, ACCD's revenue guidance for the current fiscal year is supported by a high proportion of recurring revenue derived from multi-year contracts and subscriptions.
As highlighted in its investor presentation, Accolade has guided for a top line of between $410 million and $414 million for FY 2024, which translates into a reasonably decent +14% revenue expansion based on the mid-point of guidance.
ACCD disclosed at Morgan Stanley ( MS ) 21st Annual Global Healthcare Conference on September 12 this year that it has an estimated "$310 million of contracted revenue with commercial customers" to be recognized in FY 2024 which accounts for around 75% of its revenue guide. Furthermore, virtual primary care business Plushcare , which Accolade acquired in the middle of 2021, generates significant recurring subscription revenue every year.
Separately, Accolade has a diversified customer base, which makes it less susceptible to revenue loss from any single client. ACCD mentioned in its investor presentation slides that it used to have six clients account for three-quarters of its top line in FY 2020, but no single customer currently represents more than 5% of the company's revenue.
In other words, the downside risk for ACCD's short term revenue is limited, and this explains why most sell-side analysts are optimistic about Accolade's FY 2024 top line prospects.
For the long run, Accolade is targeting to achieve a +20% revenue CAGR and record a top line of $1 billion in FY 2029.
In my view, ACCD's top line expansion goal is realistic. Even when ACCD reaches a revenue of $1 billion a few years later, this represents less than 0.5% of the company's estimated TAM (Total Addressable Market) at $216 billion (source: investor presentation slides).
Moreover, Accolade highlighted at the MS healthcare investor event on September 12, 2023 that healthcare expenses are projected to grow at an annual rate of +6%-8%. This should drive significant demand for ACCD's solutions in the future, as employers turn to solutions provided by Accolade to reduce their overall costs relating to employee healthcare.
As an example of potential expense reductions, Accolade revealed at its Capital Markets Day that patients enrolled in the programs offered by ACCD's partner Virta Health "lose 12% of body weight at 1 year and sustained at 2 years", and this results in "economic savings about $500 per member" on a monthly basis.
Profitability Outlook
There is uncertainty about Accolade's ability to meet earnings expectations every quarter going forward. Also, ACCD is expected to take a pretty long period of time to realize operating profitability.
ACCD acknowledged at the Morgan Stanley 21st Annual Global Healthcare Conference last month that "there may be years where we choose to grow a bit more or choose to put more to the bottom line as we see opportunities come to market." In other words, there is a meaningful risk of earnings misses in the quarters ahead, as Accolade might choose to prioritize growth over profitability at certain times.
History tells a similar story. In the past 13 quarters, Accolade's revenue fell below expectations for just one quarter, and that was a marginal -0.4% miss . In contrast, ACCD's bottom line came in lower than the market's consensus estimate for five of the last 13 quarters.
In the long term, ACCD has set a target of reporting normalized EBITDA margins between 10% and 15% in FY 2029, even though the company is currently still loss-making at the EBITDA level.
In comparison, the consensus financial estimates (source: S&P Capital IQ ) point to Accolade turning EBITDA positive in FY 2025 and recording an EBITDA margin of 9.6% for FY 2028.
I think that there is a good chance of Accolade hitting its long-term EBITDA margin goal. This is because the key EBITDA margin improvement driver for ACCD is operating leverage, and I have a positive opinion of Accolade's revenue growth prospects as detailed in the preceding section.
However, loss-making companies are not favored by investors in this higher-for-longer interest rate environment. ACCD acknowledged at the September 2023 Morgan Stanley investor event that "we certainly hear loud and clear from the investment market, the importance of helping investors discern companies that actually will be profitable in the long term versus those that will not." Although Accolade is expected to generate positive EBITDA by FY 2025, the analysts project that ACCD will remain loss-making at the EBIT level till FY 2028.
As per valuation data sourced from S&P Capital IQ , Accolade's consensus forward next twelve months' Enterprise Value-to-Revenue multiple has already de-rated significantly from its year-to-date peak of 2.96 times registered in late-April to 1.87 times as of October 2, 2023. The valuation multiple compression for ACCD might be attributable to the concerns about the company's short-term and long-term profitability.
Closing Thoughts
ACCD's shares are rated as a Hold. I am positive on Accolade's revenue growth outlook. But I am worried about the company's future quarterly bottom line performance, as ACCD might struggle to strike a delicate balance between growth and profitability.
For further details see:
Accolade: Consider Both Growth And Profitability