Athenahealth (ATHN) was one of 2013’s biggest success stories. As both a cloud computing stock and a healthcare billing processor, ATHN stock was as the middle of two big trends of the year: tech picks and Obamacare picks.
David Einhorn is targeting Athenahealth on the short side.
Investors piled into Athenahealth stock, bidding up shares from just more than $70 to start 2013 to a peak above $200 in March of this year.
But now, thanks to recent attention from big-time short-seller David Einhorn of Greenlight Capital, shares of ATHN stock are down more than 40% from their recent highs.
So what gives? Is this just another smear campaign being run by a well-heeled Wall Street insider, or is there actually merit to shorting Athenahealth stock after this Einhorn call?
Unfortunately for ATHN investors, an analysis of Athenahealth shows that David Einhorn and Greenlight Capital might be on the right side of this trade … and those who bid up the healthcare and technology play last year could be holding the bag if they haven’t sold yet.
Athenahealth Profits Run Dry
For starters, let’s make clear that Athenahealth is growing sales quite nicely. Just back in April, ATHN saw sales jump 30% year-over-year as its cloud based software for physicians remained in high demand.
Of course, that growth missed expectations, as did adjusted profits.
Even worse, the margins are nonexistent — which doesn’t leave much room for error. Todd Campbell over at The Motley Fool noted just after Q1 earnings that:
“Despite healthy gross margins near 60%, athena’s operating margin was just 5.4% of sales in the first quarter. That translates into an anemic $9 million in profit, or an adjusted $0.12 per share in earnings. That’s hardly encouraging given the operating margin last year was higher, resulting in earnings per share of $0.38 in the first quarter of 2013.”
The stock had already rolled back from highs above $200 a share to around $160 in late March, and then earnings whacked it down even more.
This is only the beginning of the pain for Athenahealth stock, according to Einhorn, because of what he sees as a poor product pipeline with new software that has been overvalued by investors.
If that’s true, no wonder Einhorn predicted ATHN could as much as fall 80% from its peak … it’s already been halved, and it won’t take much more for Athenahealth to get down that far.
ATHN Stock – Another Cloud Computing Fad
I can’t speak to the speculation about Athenahealth’s products, such as Einhorn’s concerns that outsourcing data will be problematic for hospitals and ultimately not result in the big sales for ATHN some investors had hoped for.
However, a look at the balance sheet shows another company that is seeing decent revenue growth but is seriously challenged when it comes to putting up actual profits. That means no matter how good or useful Athenahealth products are, the reality for investors is that ATHN stock could be a bad bet after such a massive run-up on such little bottom-line success.
As we’ve seen with so many tech stocks, valuation is key. From Twitter (TWTR) to Amazon (AMZN), we’ve seen investors punish players that continue to grow revenue but disappoint on profits. I’d expect that to continue at ATHN stock, regardless of whether Einhorn is right about the long-term potential of Athenahealth’s product pipeline.
I recently called cloud computing stocks like Netsuite (N) and Workday (WDAY) “fad stocks” thanks to investors demanding near-perfection after bidding up shares … and the cold reality of unprofitable businesses in the near-term.
Athenahealth is better than breakeven on an adjusted earnings basis, but this same story applies.
Einhorn is right to call Athenahealth a bubble stock. And that bubble has clearly already started to burst.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
