HealthEquity, Inc. HQY has been gaining from its business model and strategy. The optimism led by a solid second-quarter fiscal 2025 performance and strength in Health Savings Accounts (HSA) are expected to contribute further. However, data security issues and macro challenges are major downsides.
Over the past six months, this Zacks Rank #2 (Buy) stock has gained 0.3% against the industry’s 2.5% decline and the S&P 500’s 10.2% rise.
The renowned provider of technology-enabled services platforms for healthcare savings and spending decisions has a market capitalization of $6.98 billion. The company projects 28.2% growth for the next five years and expects to witness continued improvements in its business. HealthEquity’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 19.8%.
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Reasons Favoring HQY’s Growth
Strong Q2 Results: HealthEquity exited second-quarter fiscal 2025 with better-than-expected results. The company witnessed solid top-line and bottom-line performances in the reported quarter. Solid growth in HSAs also drove the top line. The solid uptick in total HSA assets in the reported quarter is promising. The expansion of both margins also bodes well.
Despite inflationary challenges, HealthEquity has experienced solid growth in HSA balances, driven by a significant increase in invested assets, which now represent a larger portion of total HSA assets. The growing number of members choosing to invest in HSAs reflects a positive trend. Additionally, more members are selecting enhanced rates on HSA cash, leading to improved and more consistent custodial yields.
Strength in HSA: As of July 31, 2024, the total number of Health Savings Accounts (HSA) for which HealthEquity served as a non-bank custodian was 9.4 million, up 15% year over year. HealthEquity reported 711,000 HSAs with investments as of July 31, 2024, up 24% year over year. Total accounts, as of July 31, 2024, were 16.3 million, up 9% year over year. This uptick included total HSAs and 6.9 million Consumer Direct Benefits (CDBs), up 1% year over year.
Total HSA assets were $29.5 billion at the end of July 31, 2024, up 27% year over year. This included $16.4 billion of HSA cash (up 17% year over year) and $13.1 billion of HSA investments (up 43% year over year).
Unique Investment Platform: HealthEquity offers multiple cloud-based platforms accessed by its members online via a desktop or mobile device. Individuals can make health-saving and spending decisions and pay healthcare bills, among other activities, via these platforms. These platforms provide users access to services offered by HQY and third parties selected by HealthEquity or its Network Partners. Among other features, HealthEquity’s HSA platform can provide users with medical bills upon adjudication by a health plan, including details, such as the amount paid by insurance.
As of Jan. 31, 2024, HealthEquity’s platforms were integrated with more than 200 Network Partners and are currently serving more than 120,000 clients.
Factors That May Offset the Gains for HQY
Data Security Issues: HealthEquity deals with high levels of sensitive personal data and information. Any form of security breach might result in the loss of sensitive information, theft or loss of actual funds, litigation, or indemnity obligations to the customers. Notably, the company’s online platform is hosted from two data centers that are located in Draper, UT and Austin, TX.
Per a data breach notice, HealthEquity experienced a data breach that impacted around 4.3 million individuals. According to the data breach notice filed with the Maine Attorney General’s office, the breach occurred on March 9, 2024, and was discovered on June 26, 2024.
Macro Challenges: Low interest rates may have a detrimental impact on HealthEquity's capacity to generate revenues from its HSA assets, client-held money, and capacity to draw HSA contributions, which may put pressure on the business's profitability. Changes in the regulatory landscape of HSAs and CDBs could call for substantial time and costs to be implemented for HQY to ensure products are compliant.
A shift in consumer healthcare spending habits can also have a detrimental effect on HQY's financial results. A decrease in government financing on healthcare, consolidation of healthcare participants, adverse shifts in the economy and government regulations could all lead to lower healthcare expenditure. Proposals for a "Medicare for all" program in the United States can significantly hinder HQY's ability to conduct business. Also, certain lingering effects of the COVID-19 pandemic can continue to weigh on the company.
Estimate Trend
HealthEquity has been witnessing a positive estimate revision trend for fiscal 2025. Over the past 30 days, the Zacks Consensus Estimate for its earnings per share has moved 9 cents north to $3.09.
The Zacks Consensus Estimate for third-quarter fiscal 2025 revenues is pegged at $290.3 million, implying a 16.5% rise from the year-ago reported number.
Other Key Picks
Some other top-ranked stocks in the broader medical space are Universal Health Service UHS, Quest Diagnostics DGX and ABM Industries ABM. While Universal Health Service sports a Zacks Rank #1 (Strong Buy), Quest Diagnostics and ABM Industries carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Universal Health Service has an estimated long-term growth rate of 19%. UHS’ earnings surpassed estimates in each of the trailing four quarters, with the average being 14.58%.
Universal Health Service has gained 56.1% so far this year compared with the industry's 48.1% rise.
Quest Diagnostics has an estimated long-term growth rate of 6.20%. DGX’s earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 3.31%.
Quest Diagnostics shares have gained 13.9% so far this year compared with the industry’s 17.9% rise.
ABM Industries’ earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 7.34%.
ABM's shares have risen 27.4% so far this year compared with the industry’s 17% growth.
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