On Tuesday, JPMorgan maintained its Overweight rating on HealthEquity, Inc (NASDAQ: HQY) and raised the price target to $108 from $86. The firm highlighted HealthEquity as a top growth pick, citing its robust fundamental trajectory expected over the next three years. The company is now included in the Analyst Focus List with a positive outlook.
HealthEquity is anticipated to see a significant increase in its financial performance, with projections of a roughly 19% compound annual growth rate (CAGR) in EBITDA over a three-year period. Additionally, the company is expected to double its earnings per share (EPS) during this time, driven by double-digit revenue growth and a 580 basis point margin expansion.
In comparison to other companies covered by JPMorgan, HealthEquity ranks third in EBITDA growth and also holds the third position based on the rule of 40, which measures a company's combined growth rate and profit margin.
The growth forecast for HealthEquity is supported by several factors, including an expected rise in custodial yield from 3% in fiscal year 2025 to 3.7% in fiscal year 2027. This increase is attributed to the reinvestment of $6.7 billion in maturing cash at current treasury rates, with a premium due to the nature of the deposits.
Additionally, the company's enhanced rates product is expected to attract a larger share of cash. Market dynamics also play a role, with a projected 6% CAGR in account numbers through 2026 and an 11% growth in assets. HealthEquity is poised to continue outpacing market growth by capturing more market share through consolidation and technology investments, such as AI and process automation.
Despite a 23% year-to-date increase in the stock price, compared to the S&P 500's 10% rise, JPMorgan sees further potential in HealthEquity. The firm believes the stock remains somewhat misunderstood, as evidenced by numerous inquiries about how the company's business model functions.
The new price target of $108 implies approximately 32% upside from the current level, based on 18 times the fiscal year 2026 EBITDA forecast, which JPMorgan considers reasonable given the company's growth trajectory.
InvestingPro Insights
As HealthEquity, Inc (NASDAQ: HQY) garners a positive outlook from JPMorgan, real-time data from InvestingPro complements this view with a detailed financial snapshot. HealthEquity's market capitalization stands at a robust $7.03 billion, reflecting the company's substantial presence in the market. The company's P/E ratio, a crucial indicator of its valuation, is currently high at 124.67, suggesting that investors are willing to pay a premium for its earnings growth potential. This aligns with the InvestingPro Tip that HealthEquity is trading at a low P/E ratio relative to near-term earnings growth, indicating that its expected earnings increase may not yet be fully priced into the stock.
The company's revenue growth is also notable, with a 16% increase over the last twelve months as of Q1 2023, demonstrating its ability to expand effectively. Furthermore, HealthEquity has shown a strong return over the last three months, with a 23.36% price total return, signaling robust investor confidence and market performance. For those considering diving deeper into HealthEquity's financials and future prospects, InvestingPro offers additional insights, including a total of 15 InvestingPro Tips to guide investment decisions. Interested investors can find these valuable tips at InvestingPro's dedicated page for HealthEquity and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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