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HealthEquity (HQY)

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Key Thesis:

  • Multiple strong moats continues to give this company a winning streak in financials
  • Growth factors will depend on extraneous circumstances – including the macro trends of ageing population and increasing reliance on health insurance.
  • Valuations look fair to slightly undervalued right now – we can still wait for a better offer!

Business Model & Moat

HealthEquity went public in 2014. This company is the ONLY PURE-PLAY HSA player that lets people manage their healthcare spending like any other investment. It provides healthcare technology platforms that empower consumers to make healthcare saving and spending decisions.

We are a leader and an innovator in the high growth category of technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions. Our platform provides an ecosystem where consumers can access their…


…healthcare savings accounts (HSAs), compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit and clinical information, earn wellness incentives, and make educated investment choices to grow their healthcare savings. HealthEquity can integrate with any healthcare plan or banking institution.

HealthEquity is the integrated HSA platform for 20 of the 50 largest health plans in the US.

Customers include Blue Cross and Blue Shield health plans in 26 states and more than 25,000 employer clients, including American Express, Dow Corning Corporation, eBay, Google, and Kohls.

The platform is built on a B2B2C channel strategy, whereby HealthEquity relies on its network partners to reach consumers instead of marketing its services directly.

HealthEquity’s platform is cloud-based. Because of its adaptability, the company believes its platform could reach a consumer market of 50 million people by 2020.

HealthEquity’s business model provides strong visibility into our future operating performance. As of the beginning of the past several fiscal years, they had approximately 90% visibility into the revenue of the subsequent fiscal year.

The company earns monthly service revenue through contracts with Network Partners and […] individual members. We earn custodial revenue primarily from our custodial cash assets that are deposited with our FDIC-insured bank partners or invested in an annuity contract with our insurance partner. In addition, we earn recordkeeping fees in respect of assets held with our investments partner and we earn fees for investment advisory services through our registered investment advisor subsidiary. We also earn interchange revenue, which is primarily interchange fees charged to merchants on payments made with our cards via payment networks. Monthly service revenue, custodial revenue, and interchange revenue are recurring in nature, providing strong visibility into our future business.

HSA Members’ balances typically grow, increasing custodial revenue without significant incremental cost to us.

A fantastic growth trajectory of revenues, net profits and free cash flow
If we look at quarterly results, we see that the business is seasonal.

A significant number of new and existing Network Partners bring us new HSA Members beginning in January of each year concurrent with the start of many employers’ benefit plan years.

Before we realize any revenue from these new HSA Members, we incur costs related to implementing and supporting our new Network Partners and new HSA Members. These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center. These expenses begin to ramp up during our third fiscal quarter with the majority of expenses incurred in our fourth fiscal quarter.

All margin metrics steadily high and stably rising – a very very good sign.
GM ave = 55%, OM ave = 20+%, NPM ave = 15+%

Moreover, the company operates on an Asset-Light business model. It has no Debt at all!

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Direct competitors include HSA custodians that include state or federally-chartered banks, insurance companies and non-bank trustees approved by the IRS.

Indirect competitors are benefits administration and payment technology and service providers that work with other HSA custodians to market to health plans and/or employers.

We believe that the primary competitive factors in the market for technology platforms that empower healthcare consumers are: integration with the broader healthcare system; level of consumer education and support; breadth of product offering; flexibility of technology to meet partner requirements; brand strength and reputation; and price.

We believe that many of our large financial competitors may view their HSA businesses as non-core and have historically under-invested in developing these businesses.

Many of our competitors have not incorporated personal health information into their offerings, as this would require significant upfront investment in technology, training, and segregation of business operations from other bank or custodial operations, as well as integration with data sources such as health plans and pharmacy benefits managers.

We believe competitors within the technology, payments or benefits administration service provider sector are limited from expanding their presence in this area due to regulatory requirements for capital adequacy and demonstrated expertise in custodial operations.

However, we experience significant competition from banks, insurance companies, and other financial institutions that have greater resources than us, and the intensity of competition may increase over time.

HealthEquity’s moat thus includes:

  • a very high barrier to entry due to upfront capital and infrastructure expenditures, and specialized knowledge in custodial operations
  • very high switching costs for HSA members, employers, medical facilities, and peripheral vendors (banks, insurance companies) who have onboarded and stuck with the HealthEquity ecosystem.
    • “Many of our partners’ systems rely on custom data models [from HealthEquity], non-standard formats, complex business rules and security protocols that are difficult or expensive to change”
    • “Retention rates for [HSA members] for the years ended January 31, 2018, 2017 and 2016 were 97.6%, 95.5% and 97.4%”
  • Patented, scalable, proprietary SaaS platform developed for more than 10 years… and boasts ease of third-party integration (2680 to be exact).

Competent & Honest Management?

ROE ave 13%, ROA ave 10%, ROIC ave 13%… and growing!
Inventory turnover has soared from 2018 to 2019, with Days of Inventory sitting on company’s shelves close to 0! (Products are almost immediately turned into sales after production!)

Days sales outstanding has been pretty constant at about 30 days (common for a typical AR customer).

We also see that days payable outstanding sits has steadily decreased to about 10 days – indicating it has the financial wherewithal to quickly pay off its suppliers or vendors!
We assess against a comp benchmark (S&P 400 Health Care Sector GICS Level 1 Index) and see that in ALL cases, HealthEquity has better metrics.

The Chairman is a Robert Selander, who was an exec vice chairman and former CEO at Mastercard. Thus, he has intimate working knowledge of platform integrations to drive HealthEquity forward.

The Vice Chair is a Dr. Stephen Neeleman, one of the co-founders of HealthEquity. He is a board-certified and practicing physician – and brings his specialized knowledge and on-the-ground experience as a general and trauma surgeon… to improve top-down leadership at HealthEquity. He ultimately wants to help more people obtain quality health insurance.

The CEO and President is a Jon Kessler, who joined 10 years ago in 2009. He founded his own listed firm called WageWorks, which provides tax-advantaged programs for consumer-directed health, commuter and other employee spending account benefits. He is competent in driving growth (as seen above, as well as his track record at WageWorks).

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Growth Plans

HealthEquity believes that continued growth in healthcare costs, and related factors will spur HDHP and HSA growth.

We have a successful history of acquiring complementary assets and businesses that strengthen our platform. We seek to continue this growth strategy and are regularly engaged in evaluating different opportunities. We have developed an internal capability to source, evaluate and integrate acquisitions that have created value for shareholders.

Many of our competitors view their HSA businesses as non-core functions. We believe more of them will look to divest these assets and, in certain cases, be limited from making acquisitions due to depository capital requirements. We intend to continue to pursue acquisitions of complementary assets and businesses that we believe will strengthen our platform.


As a passive and non-passive non-bank custodian, the Company must maintain net worth (assets minus liabilities) greater than 2% of passive custodial funds held at each calendar year-end and 4% of the non-passive custodial funds held at each calendar year-end in order to take on additional custodial assets. As of December 31, 2017, the Company’s year-end for trust and tax purposes, the net worth of the Company exceeded the required thresholds.

There is also the risk of data privacy loss – which would materially impact the company.

There is also the risk that any Network Partner (such as an employer) could pull out of HSA, HRA, FSA programs – which would reduce the tax benefits for these accounts… or the reliance on such programs reduces… which would materially impact the financials of the company.

Increased focus on HSA-favorable healthcare regulatory reforms may create renewed interest and investment by our competitors in their HSA offerings and lead to greater competition, which could make it harder for us to maintain our growth trajectory. Our competitors may also offer reduced fee or no-fee HSAs, which may permit them to increase market share in our market and lead to customer and Network Partner attrition, or cause us to reduce our fees; and this risk could be compounded if legal requirements or administrative rules are interpreted in a way that makes compliance more onerous for us than for our competitors.

If our members do not continue to utilize our payment cards, our results of operations, business and prospects would be materially adversely affected. We derived 22%, 23% and 22% of our total revenue during the years ended January 31, 2018, 2017 and 2016, respectively, from fees that are paid to us when our customers utilize our payment cards.


Such a company does not come cheap. EV/EBITDA has been hovering averagely around 41 times.
If we use the exit multiple approach, using a EV/EBITDA at the lower end around 36.33x and a FY2020 EBITDA estimate of 135.64 (with a expectancy of close to 90%)… we derive a expected fair value of $87.95, a 25.20% potential gain at the current price of $70.25. We conclude that at this price, it is only slightly undervalued or close to fair valued and we are waiting for a significantly larger dip before swooping in!
If we look at comps (S&P 400 Health Care Sector GICS Level 1 Index), we see that our EV/EBITDA is on a higher level (almost double) than the benchmark – thereby indicating fair value due to its premia.

We also compare PE and see the same thing.

We conclude that at this price, it is only slightly undervalued or close to fair valued and we are waiting for a significantly larger dip before swooping in!

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