Are Internet-Based Businesses the Way of the Future?
During the 1990s, the internet started to gain mainstream appeal amongst many facets of the American public. SInce then, the internet has become a staple for many people, integrating itself into the lives of millions of Americans and other people worldwide. Since its introduction into the mainstream, the internet's usability has drastically increased: users can conduct financial transactions, stay in touch with friends, and learn about virtually any subject they want. While many of these functions have already been monetized significantly, there may be opportunities remaining for smaller companies.
The health care industry is one of the few industries that has not fully capitalized on the internet's capabilities. For example, monitoring drug usage among patients and tracking certain health-related statistics could be mediated via the internet. One company has taken advantage of the internet in another way: using its resources as a learning and teaching tool for professionals across health care. HealthStream (NASDAQ: HSTM) provides a suite of products that health care companies use for training rising professionals in the pharmaceutical, services, and medical technologies sub sectors.
The stock has appreciated over 100% over the past year, so why would investors be interested in purchasing it now? The company's fundamentals appear to be quite strong, as it has been able to increase its top-line year over year. Based on quarterly results, it seems like 2011 revenue will beat 2010 as well. This particular trend make sense, as health care is one of the toughest fields out there. It takes a significant amount of resources to be able to train people to be competent professionals. Just like how many companies would rather purchase other companies to gain a function instead of developing it in-house, many companies save money by outsourcing training programs instead of having their own. Considering this fact, it seems likely that HealthStream's business will continue to grow as long as the health care industry grows itself. Costs of revenues grew at a slower rate, meaning that gross margins have been increasing at a rising rate.
HealthStream's operating expenses, including those for research and development as well as salaries and marketing, have been increasing at a fairly quick rate. However, operating margins have been able to increase at a steady rate. For the most part, net income has been steadily increasing. In 2009, the company increased operating income by $9 million due to income tax provisions, bumping up its net income number. However, this number is not reflective of the company's operational abilities, but rather a one-time occurrence for the firm.
HealthStream's cash position also seems to be positive, showing positive trends over the last several years. Cash flow from operations have increased as a result of positive changes in working capital, along with increasing net income. Moreover, the company's capital expenditures seem to be static, year over year. This may mean that the company is consistently growing, without plans of significant physical expansion. In the last year, the company started to purchase securities, which may be for hedging purchases, given the unstable economic environment. Overall, the company has been growing cash every single year, weathering significant market downturns in 2008 and 2009.
While the firm is fundamentally growing rapidly, does the operational success warrant such a huge run-up in stock price? It is currently trading 65.4 times earnings, drastically higher than comparable companies, which trade 25.1 times earnings, on average. A similar situation is apparent using price/book value. In terms of price/sales, HealthStream is trading 5.4x, while competitors are trading at about 5.5x. Interestingly, the company seems to not be providing impressive returns to shareholders. Its ROE is about 10.7%, while competitors are returning about 15.2%.
Certain other growth metrics paint a mixed picture for the firm. While its revenue growth is almost twice that of competitors, HealthStream has a tiny EPS growth rate over the last three years. As mentioned before, the income tax provision artificially boosted net income, and therefore EPS, in 2009. As such, it made the following year's EPS growth negative. Another conundrum is that its operating margin is three times that of its competitors, while its net margin over two times lower. This could be related to wild fluctuations in income tax charges to the company. Lastly, it operates at almost 0 debt: it has no short-term or long-term debt accounts.
The last thing investors should consider is the overall condition of equity markets. The European debt situation is increasingly burdening and worrying investors across the globe. As Italian and Spanish bond yields are skyrocketing, investors are starting to wonder if the underlying debt problems are truly contagious and prevalent across all the major European economies. Moreover, the European Financial Stability Facility is failing to create its bailout fund, which is relying on 3-5x leverage to cover everyone in the Eurozone. Apart from Europe, the United States' own Congress is unable to find agree upon ways to decrease its debt load via spending cuts. Considering everything going on in the western hemisphere, investors may want to wait until all the macroeconomic issues play out before making any investments based on fundamental analysis.
Based on operational performance and trading metrics, HealthStream may be an interesting stock for some investors. Keeping in mind macroeconomic factors, some may want to consider holding off on investing in the company. Regardless, it has been doing well fundamentally and may provide some investors exposure to technology and health care, in a unique, interesting manner. Investors should also learn more about management's plans for the future along with the company's current product suite.
HealthStream is currently trading at about $17.80, up over 120% for the year.
Traders who believe that HealthStream is an appropriate long investment might want to consider the following trades:
- The company is diversified across the health care and technology industries, enabling it to reevaluate its game plan should any systemic problem occur in an industry.
- Its operational success has been unrelenting, increasing all positive facets year over year.
- HealthStream has been gaining momentum over the years and bringing in contracts, weathering the economic crisis in 2008 and 2009.
Traders who believe that HealthStream is more suited for a short play may consider an alternate position:
- Boingo may suffer from two potential government regulations: its business could slow down if the Patient Protection and Affordable Care Act is passed, which would destroy health insurers' margins. Also, if total internet usage declines due to the Stop Online Piract Act, the company's traffic could decline drastically.
- The company's net margins are still fairly thin, meaning that a large fluctuation in interest expenses could bring it down significantly.
- HealthStream may not fare well if global economic conditions falter.
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