Core Growth At Inovalon Slackening, Morgan Stanley Says In Downgrade

Inovalon Holdings Inc INOV, a technology company providing cloud-based platforms to the health care industry, is beset by client losses, ACA headwinds and pricing concerns, an analyst at Morgan Stanley said.

The Analyst

Morgan Stanley's Ricky Goldwasser downgraded Inovalon from Equal-weight to Underweight and lowered her price target from $15 to $10.

The Thesis

Inovalon's return to 10 percent organic growth could now take longer than expected, given a contract loss post September 2017, ACA headwinds and CFO departure, Goldwasser said in a note.

Although the recently announced Ability acquisition gives the company entry into the highly competitive revenue cycle management, or RCM, market, the leverage arising out of the deal will likely limit M&A in the near to mid-term, the analyst said.

The analyst sees Inovalon's organic revenue growth profile to be capped at 6-9 percent, as market saturation, and unwinding of the ACA represent headwinds to growth.

As such, Morgan Stanley lowered its long-term growth rate in its DCF model from 10 percent to 7.5 percent, with the terminal growth estimate maintained at 15 percent.

To reflect the ABILITY deal, the firm raised its 2018 and 2019 top-line estimates from $478 million and $531 million, respectively to $572 million and $648 million, with 3 percent and 5 percent growth contributed organically.

The Price Action

Inovalon shares are down about 2.5 percent over the past year. Reacting to the downgrade, shares fell 6 percent to $11.18.

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