Zacks Equity Research has issued an “Outperform” rating for HealthEquity, Inc. (HQY), reflecting optimism surrounding its future growth, particularly within the Health Savings Account (HSA) market. As of October 17, 2024, HealthEquity’s stock price stands at $88.00, with a 6-12 month price target of $98.00, implying a potential upside of 11.4%. HealthEquity’s strong position in the HSA market, growth in revenues, and technological innovation highlight its potential for investors. However, risks related to competition and data security remain. Investors are advised to perform due diligence before investing.

Stock Price and Target Overview

Currently trading at $88.00, HealthEquity is expected to rise to $98.00 within the next 6-12 months. This price target reflects Zacks’ confidence in the company’s market positioning and future performance. Year-to-date, the stock has appreciated by 29.5%, supported by strong financial results and increasing investor interest in healthcare services.

Zacks’ upgrade from "Neutral" to "Outperform" underscores their positive outlook, driven by sustained growth in the HSA market and increasing member engagement. Investors looking to capitalize on the healthcare sector’s expansion, particularly in tax-advantaged savings accounts, will find HQY an attractive option.

Financial Highlights and Performance Metrics

HealthEquity has demonstrated strong financial performance across several key metrics:

P/E (Forward 12-Months): 28.6, indicating moderate growth expectations relative to the medical services industry.
Market Cap: $7.5 billion, positioning HealthEquity as a major player in the sector.
Beta: 0.52, reflecting lower volatility than the broader market.
YTD Price Change: 29.5%, a strong indication of investor confidence.
The company’s last earnings surprise was notable, beating expectations by 22.9%. This strong performance reinforces HealthEquity's financial stability and potential for continued growth.

Strong Position in Health Savings Accounts (HSAs)

HealthEquity’s dominance in the HSA market is central to its future growth prospects. As of July 31, 2024, the company managed 9.4 million HSAs, up 15% year-over-year. Total HSA assets grew 27% during the same period, reaching $29.5 billion, which includes $16.4 billion in HSA cash and $13.1 billion in HSA investments.

HSA Investments have become a major driver of growth, with more members choosing to invest their HSA funds. This trend indicates a shift toward long-term savings within the platform, further boosting custodial yields. The company is also seeing a higher number of members opting for enhanced rates on HSA cash.

HealthEquity is expected to benefit from the continued expansion of the HSA market, with estimates suggesting the industry will surpass 40 million accounts by 2025, holding over $150 billion in assets.

Revenue Growth and Business Model

HealthEquity operates on a B2B2C model, offering cloud-based platforms that allow members to manage their healthcare savings and benefits. The company’s revenue is derived from three primary sources:

Service Revenues: 45.6% of net revenues, up 0.8% over FY23.
Custodial Revenues: 38.7% of net revenues, up 47.9% year-over-year.
Interchange Revenues: 15.7% of net revenues, up 5.9%.
The company’s total revenues are projected to grow at a compound annual growth rate (CAGR) of 14.5% between fiscal 2023 and 2027, with adjusted earnings per share expected to exhibit a CAGR of 35.1% over the same period. This growth is driven by increasing member engagement, the acquisition of new clients, and the expanding market for HSAs and consumer-directed benefits (CDBs).

Technological Advancements and Acquisitions

HealthEquity continues to invest in innovative technology platforms to enhance user experience and streamline operations. As of January 31, 2024, its platforms were integrated with over 200 network partners and served more than 120,000 clients. The company's focus on scalability and automation has led to greater efficiency and improved service delivery.

Recent acquisitions, such as BenefitWallet from Conduent for $425 million, have further expanded HealthEquity’s HSA portfolio. This acquisition transferred 665,000 customer accounts and $2.7 billion in HSA assets to HealthEquity. The integration of these accounts is expected to boost the company’s market position and drive future growth.

However, the success of these acquisitions depends on HealthEquity’s ability to efficiently integrate the acquired businesses, streamline operations, and realize synergies. Failure to do so could negatively impact the company’s financial performance.

Risks and Challenges

Despite its strong market position, HealthEquity faces several risks:

Data Security: HealthEquity handles large amounts of sensitive personal data, making it vulnerable to cyberattacks. A data breach earlier in 2024 impacted 4.3 million individuals, highlighting the risks associated with maintaining secure technology platforms. Any further breaches could lead to reputational damage, legal liabilities, and potential loss of customers.

Regulatory Environment: HealthEquity operates in a highly regulated industry, and any changes in the legal framework governing HSAs or CDBs could require significant time and resources for compliance. Proposals for "Medicare for All" or other healthcare reforms may also disrupt the company’s business model.

Competition: The medical services industry is highly competitive, with several HSA custodians, such as Optum Bank and Webster Bank, offering similar services. HealthEquity must continue to innovate and differentiate its offerings to maintain its leadership position.

Economic Pressures: Macroeconomic challenges, including inflation and potential declines in healthcare spending, could impact HealthEquity’s growth. Lower interest rates, in particular, could reduce revenues from HSA assets and client-held funds.

Valuation and Industry Comparison

HealthEquity’s stock is currently trading at 5.9x forward 12-month sales, slightly above the sector average of 3.0x but below the S&P 500 average of 5.2x. This valuation reflects the company’s growth potential and market leadership. Over the past five years, the stock has traded as high as 9.8x and as low as 3.4x, with a median of 5.6x.

While HealthEquity faces stiff competition, its leadership in the HSA market and strong growth outlook position it favorably compared to peers. The company’s outperformance in the medical services sector underscores its ability to deliver strong returns for investors.

Conclusion

Zacks’ “Outperform” recommendation and price target of $98.00 suggest that HealthEquity is poised for continued growth, driven by its dominant position in the HSA market and innovative technology platforms. With a robust financial outlook, strategic acquisitions, and a growing user base, the company is well-positioned to capitalize on the expanding healthcare savings market.

However, investors should remain cautious of potential risks, including data security vulnerabilities, regulatory changes, and increased competition. Despite these challenges, HealthEquity’s long-term growth prospects make it an attractive option for investors seeking exposure to the healthcare services sector.

Disclaimer: This report is for informational purposes only. Investors should consult with financial professionals before making any investment decisions. This analysis does not constitute financial advice.