2023-07-20 15:56:18 ET
Summary
- I maintain a buy rating for ACCD as I expect growth reacceleration in FY25 which will drive valuation upwards.
- ACCD's management has raised revenue expectations for FY24 and reiterated long-term revenue targets.
- Potential risks include rising interest rates and the possibility of management missing profit outlook, which could lead to a lower stock price.
Overview
My recommendation for Accolade ( ACCD ) is a buy rating, as I expect growth to reaccelerate in FY25 and valuation to see a further premium vs. peers once that happens. Note that I previously gave a buy rating to ACCD, as I believe the drop in share price after the 1Q23 earnings was not warranted given the strong 4Q23 profit and upgraded FY25 margin. I am reiterating it.
Business
ACCD provides individualized, technology-enabled solutions to help individuals make the most of their healthcare and workplace benefits.
Recent results & update
Revenue for 1Q24 came in at $93.2 million, with adj EBITDA coming in at a loss of $12.6 million. The growth of the expert medical opinion [EMO] market, combined with the early recognition of performance guarantees [PG], contributed to a 9% increase in total revenue. The fact that management feels assured enough to comment on the pipeline so early in the selling season is something to keep in mind. Specifically, management claims their pipeline is larger than it was a year ago, and the number of physicians offering their professional opinions is increasing faster than expected. I believe this growth commentary has a huge positive impact on sentiment around the stock as it impacts 2Q24 sales. I am optimistic that this trend will continue to drive growth as the vast majority of deals involve multiple products (note high incremental margins as incremental cost to service additional module is low) and also continue for the foreseeable future as this phenomenon has persisted over the course of the past year.
Moreover, management has reiterated long-term goals while raising expectations for FY24. In light of the strong performance in 1Q24, management has revised their revenue forecast for the full year to a range of $410 million to $414 million, up from the previous estimate of $410 million. Additionally, management restated revenue targets of $500 million in 2025 and $1 billion in 2029, which equates to a top-line CAGR of roughly 20% during that time frame.
After seeing ACCD's solid start to FY24, I have no plans to change my optimistic outlook. I share ACCD's optimism heading into 2Q24, as the company's pipeline remains robust and demand for multiple products is healthy. ACCD noted that the EMO segment is growing at a 30% rate, which is significantly higher than the 20% range that was originally anticipated. This is due to a healthy increase in both adoption and usage among new customers. Both direct-to-consumer [DTC] demand from GLP-1 drugs and enterprise usage that exceeded goals have also contributed to the continued success of virtual primary care [VPC]. I continue to have faith in ACCD's ability to meet or exceed their FY25 goals, and I anticipate healthy bookings throughout FY24 as a result of the robust demand environment.
On the other hand, despite HealthNet's protest subsiding in September, I'm a little concerned that the T-5 contract appeals process is still ongoing. Because of the ongoing protest, I do not anticipate T-5 implementation any time soon, and comments from management indicate that more delays may be on the horizon.
Valuation and risk
Author's valuation model
According to my model, ACCD was valued at $19.45 in FY24, representing a 34% increase. This target price is based on my growth forecast of 13% in FY24 (management guidance) and 20% in FY25 (long-term guidance). I believe the slowdown in FY24 is simply a matter of the macro environment, and things should rebound back to normal in FY25.
ACCD is now trading at 2.5x forward revenue, which I believe will rise over the next two years as ACCD growth reaccelerates. Note that despite multiples increasing from 1.7x to 2.5x, they are still below the historical average of 5.5x. In FY24, I projected NTNX would trade at 3x forward revenue. I believe the value is appropriate because the ACCD growth premium vs. peers will further widen (from the current 10% vs. 8% to 20% vs. 8%).
Reiterating my previous risk, the stock is in the "decent growth, huge losses" category, so it will continue to screen badly. This is in contrast to fast-growing software companies that exceed 30% annual revenue growth and the "rule of 40." I am concerned that the stock price will be punished by a re-rating to a lower level if interest rates rise, growth slows, or management misses any part of its profit outlook.
Summary
I maintain my buy rating on ACCD based on the expectation of growth reacceleration in FY25, which I believe will drive valuation upside. Despite the recent loss in adj EBITDA for 1Q24, the growth in the expert medical opinion market and strong performance in other segments indicate positive trends for future growth. Management's reiteration of long-term revenue targets and raised expectations for FY24 further support my optimistic outlook.
For further details see:
Accolade: Growth Reacceleration In FY25 Should Drive Valuation Upside