Wells Fargo Downgrades Castlight Health, Nextgen Healthcare To Underweight

Castlight Health Inc CSLT and Nextgen Healthcare Inc NXGN could be the worst performers among the digital health stocks covered, according to Wells Fargo.

The Analyst

Wells Fargo’s Jamie Stockton downgraded Castlight Health and Nextgen Healthcare from Equal-Weight to Underweight.

The Thesis

Castlight Health’s organic growth plummeted from 14% in 2018 to -9% in 2019, following the loss of Walmart Inc WMT as a flagship customer and continued churn within the Jiff customer base, Stockton said in the downgrade note.

The analyst expects “the pain to continue in 2020,” resulting in organic growth of -8%. He added, “A shakeup in management and re-commitment to spending on growth could turn things around, although we do not expect significant signs near term.”

Castlight Health enjoys a strong relationship with Anthem Inc ANTM, which now accounts for around 50% of its contracted revenue, and the company is seeking other health plan partners, Stockton said. He added, however, that the company’s legacy business could remain under pressure.

Stockton further mentioned that the Care Guides initiative is unlikely to be a near-term catalyst. The analyst also lowered the price target for the company from $1.75 to $1.20.

Referring to Nextgen Healthcare, Stockton said that the company had indicated at its analyst event that it may not generate earnings growth until fiscal 2023. This seems realistic, given continued declines in the company’s high margin license revenue, contraction of its support and maintenance base and its growing R&D spend.

Although Nextgen Healthcare seems to be making the right investment decisions, it seems difficult to expect its stock to perform well in the near term in the absence of earnings growth for the next couple of years, Stockton mentioned. He cut the price target for the company from $18 to $16.

Price Action

Shares of Castlight Health had declined almost 9% to $1.06, while shares of Nextgen Healthcare had dipped less than 1% to $15.57 at the time of publishing on Wednesday.