HealthEquity, Inc. (NASDAQ:HQY): A Bull Case Theory

We came across a bullish thesis on HealthEquity, Inc. (NASDAQ:HQY) on ValueInvestorsClub by Fat_Tony. In this article, we will summarize the bulls’ thesis on HQY. The company’s shares were trading at $111.75 when this thesis was published, vs. the closing price of $79.94 on Apr 10.

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HQY provides technology-enabled service platforms to individuals for making health saving and spending decisions, paying healthcare bills, receiving personalized benefit information, earning wellness incentives, growing their savings, and making investment choices. It is one of the leading Health Savings Account (HSA) providers.

The HSA asset base has witnessed mid-teens growth over the years but is expected to offer a more stable mid to high single-digit rate in the future. The opportunity still exists in a seemingly mature market where only 37 million of the 110 million households have HSA accounts. HQY has been an outperformer in this segment, capturing 27% of the account share. The number of HSA accounts for HQY grew by 13%, much higher than the mid-single-digit growth of the industry.

The existing Republican government is also expected to frame regulations that are expected to grow the HSA corpus in a bid to “denationalize” healthcare. Modifications to the HOPE Act should make more people eligible for HSA accounts. These include veterans at Veterans Affairs facilities and elderly people availing Medicare through their Social Security benefits. The limit for contribution towards HSA is also expected to rise from $4.15k to $7.5k per person. There may also be an expansion to the services for which funds in the HSA can be used. Direct Primary Care, funeral expenses and gym membership can be brought under the coverage of HSA.

HQY has been able to grow the cash balance at 13-14% in the last five years and has deposited these funds in 5-year term deposits or CDs. Lately, the funds are invested in annuities, allowing HQY to earn the 5-year Treasury rate + 75 bps compared to the 5-year Treasury rate + 10 bps when it was held in banks. The current mix is 45:55 in favor of annuities expected to change to 15:85 in the next few years. This conversion in the portfolio should increase EPS by 65% in the next five years. While the consensus EPS for 2027 is $4.76, HQY can easily achieve an EPS of $6 with its current growth rate and portfolio reconstruction. This offers a P/E of ~14x at its current price, making it an attractively priced stock.

While we acknowledge the potential of HQY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than HQY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.