Here's A Guide To David Einhorn's Battle Against A Company That Thinks It's Revolutionizing The Healthcare Industry
To David Einhorn this looks like a business process outsourcing company (BPO) - a company that helps other companies. Cool solid business but nothing eathshattering.
To athenahealth's CEO Jonathan Bush, this is a radical company changing the face of healthcare through technology.
We published Einhorn's main presentation here, but we also get that some people don't want to click trough 67 slides filled with discounted cash flow projections and what not.
So we'll keep it nice and simple for you. There are really three big reasons why Einhorn thinks this company's stock is ridiculously overvalued.
- It simply hasn't met analyst expectations,
- it's narrative about itself is all out of whack,
- and because of that narrative Wall Street makes wild assumptions about how well the business can do in the future.
Before we break all that down, though, here's a recap of the action this week:
Since Einhorn spoke the athena's stock has fallen over 15% to around $108. His best case scenario is that it will go down to $50 - worst is that it will sink to $14.
Meanwhile, Jonathan Bush, athenahealth's CEO is making the rounds doing damage control, and has said that he still believes the stock is worth $1,000, though he's not sure how anyone comes up with valuations.
"I don't know what we're worth," he said on Bloomberg TV. "What I do - I know we're worth $1,000 a share, no problem, at some point in the future. And it's up to David and others to decide when by discounting back what they think… I pulled [the valuation] out of my ear."
This is probably not the best thing for a CEO to say, especially since (per our first reason why Einhorn doesn't like this stock) his company hasn't met the expectations that analyst set for it over the past several quarters.
The stock started going bonkers back in 2012 when it shot up from $60 to $204 in 16 months. Now, for an explosion like Einhorn says you'd need organic revenue growth of 30%, but athena hasn't come close. In fact, its targets have been lowered for 2014 and 2015. The same thing goes for gross and operating margins.
So why are analysts ignoring the fact that this company isn't performing in line with its stock price? Einhorn argues that it is, in part, because of the company's narrative. Bush says that athena is a revolutionary "cloud based software" solution. He compares it to companies like Salesforce, Facebook, Air BnB, Opentable....
"Saying cloud over and over doesn't make it rain," Einhorn wrote in his slide deck.
His point is that athena is a BPO, period. That means it's in a peer group with margins averaging around 10% before stock based compensation.
Meanwhile, expectations of athenahealth's margins with stock based compensation have been lowered to somewhere around 5% going into 2015.
But analysts keep on plugging in numbers based on this anthena-as-Amazon narrative, which means the assumptions (in Einhorn's opinion) get pretty wild. In his presentation he really ripped into Morgan Stanley for doing this in a variety of ways.
Einhorn says the Morgan doesn't just confuse athena with Facebook, it confuses it with a bigger company that services bigger, wealthier doctors, but it doesn't do that.
From the presentation:
"Morgan Stanley says the average doctor currently collects $636,000 annually, on the way to $1.3 million in 2030. Currently, athena's doctors collect only $370,000 of which athena keeps about 4.4% or $16,000. Athena's doctors get much less than the national average because athena has a concentration in low-earning primary care physicians. Even if athena were to win higher-billing physicians, athena would adjust its billing rate downward because it prices its business to earn a certain amount per physician, and uses a sliding scale so higher-billing doctors pay a lower percentage... Morgan Stanley assumes athena will recognize $63,000 in revenues per doctor by 2030 from $16,000 today. We think it is more reasonable to assume that revenue per doctor grows with Ambulatory spending. On that basis, Athena's revenue per doctor would still more than double to $36,600 in 2030."
More than that, if athena wants to get into that bigger doctor, hospital space it has to contend with the leader in that world, Epic Systems, a company with 100% retention rate among its big healthcare customers.
Meanwhile, as those big healthcare customers swallow up little doctors and hospitals (as is all the rage right now), they're switching the little guys into the big guys' system. Einhorn thinks this means that athena could lose customers like Integris, CaroMont, Vanguard and more.
Simple stuff, really.