The Drivers Behind HealthStream's 2018 Rally Are Unclear, Baird Says In Downgrade

Baird’s Matthew Gillmore downgraded HealthStream, Inc. HSTM from Outperform to Neutral Thursday while maintaining a $24 price target. 

'Further Multiple Expansion Seems Unlikely' 

HealthStream’s share price had climbed an impressive 24 percent this year as of Wednesday’s close. Although the company has reported strong earnings the past two quarters, Gillmore said it's unclear what has driven the stock’s appreciation.

The stock is now in line with long-term average of about 3.3x forward revenue. “In our view, further multiple expansion seems unlikely, given HealthStream is a growth story and growth may be challenging during 2019-2020,” the analyst said in a note.

The reason for that stunted growth is the transition away from established resuscitation products, Gillmore said. The company announced last year that it would not renew its agreement with Laerdal to distribute its HeartCode and RQI products effective at the end of 2018.

Those products were lower-margin, but represented approximately 20 percent of HealthStream’s revenue — which most investors value the company by, the analyst said. 

2 Growth Opportunities 

HealthStream is working on new CPR solutions intended to replace the lost Laerdal revenue, Gillmore said. New information from the company could increase confidence in growth through 2020, particularly if it can leverage a strong brand partner, the analyst said. 

HealthStream has been shifting its business from content distribution toward content ownership and analytics. If all goes well, margins could expand faster than the analyst predicts, he said. 

“HealthStream is a uniquely positioned platform with solid growth prospects, but we think risk-reward is balanced at current levels." 

The Price Action

Shares of HealthStream spiked down 7 percent at Thursday’s open, but quickly recovered about half of that loss and were trading in the high-$27 handle midday. 

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