Takeaway: We added HQY to Investing Ideas on the short side on 9/20.

Stock Report: HealthEquity (HQY) - HE HQY table 10 11 17

THE HEDGEYE EDGE

Since Election Day, shares of HealthEquity (HQY) are up +60% on prospects of health reform expanding the role of Health Savings Accounts (HSAs).  Policy tailwinds notwithstanding (which have since diminished), we believe it will be difficult for HealthEquity to sustain > 20% sales growth in perpetuity with 53% of large* employers offering an HDHP/HSA option as of 2016.  These large businesses represent 47% of private sector employment in the United States and 24% of covered employees.  Our HSA adoption model projects annualized HSA account growth of 10-13% market-wide through 2020, a significant deceleration from the 23% CAGR from 2013-2016.

Stock Report: HealthEquity (HQY) - hqy1

Stock Report: HealthEquity (HQY) - hqy2

INTERMEDIATE TERM (TREND)

Low industry barriers to entry have been conducive to heightened competition and service account fee pricing pressure from Health Plans, who increasingly have in-sourced or diversified their Consumer Directed Health Plan (CDHP) offerings. In May 2017, HealthEquity's largest customer, Anthem (~8% of accounts), launched a new CDHP/HSA solution branded "Act Wise" as a competing option to HealthEquity.  

Prior to May 2017, HealthEquity was Anthem's preferred HSA administrator.  While employers can decide to remain with HealthEquity, we believe Anthem will likely offer price concessions as an incentive to switch.   

Stock Report: HealthEquity (HQY) - hqy3

LONG TERM (TAIL)

Given the prevailing growth narrative, we believe it will be difficult for the stock to hold its premium multiple (27x 2018 EBITDA / 71x 2018 EPS) in the face of slowing revenue growth due to a maturing market, higher attrition, and pricing pressure.

Stock Report: HealthEquity (HQY) - 20170809 HSA Adoption Model

ONE-YEAR TRAILING CHART

Stock Report: HealthEquity (HQY) - HE HQY chart 10 11 17