In a slow
, it's so hard to find companies capable of scorching growth. The
only companies you should be researching -- if you're looking to
double or triple your money -- are the ones that aim to
revolutionize an industry.
Medical software firm
has done just that. The company helps doctors automate their
billing practices while enabling the migration to electronic
As more doctors have signed on, the company's revenue base has
surged. In fact, it has risen at least 30% in seven straight years.
I'm not sure you'll find another
with so many years of sustained growth like that.
Despite this track record, it took awhile for investors to catch
only took off near the end of 2010, but have been on steroids ever
Yet such a fast-growing company invariably runs into the same
problem that many have before it. Growth inevitably slows, and when
it happens, momentum investors run for the exits and go in search
of the next hot growth stock. Amazingly, athenahealth shows no
signs of cooling off. Analysts say sales will grow 30% this year,
again in 2013 and in 2014 as well.
Yet it's the composition of this growth that has some analysts
concerned. Up until now, the fastest-growing part of athenahealth's
business has been its billing software segment, known as
athenaCollector. As it has comprised an increasing percentage of
sales, this company's gross margins have soared: They exceeded 50%
for the first time in 2006, and have since risen every year to a
Trouble is, the fastest-growing division for the company is now
"Clinicals," which is the electronic medical records segment. This
segment isn't just software. There's a lot of hand-holding that
goes into supporting each physician practice. "With
athenaClinicals, the tasks surrounding the point of care requires
far more labor hours per physician, like fax scanning and upload,
lab image uploads, as well as customer support," note analysts at
As a result, this company's never-ending surge in gross margins
looks to be near an end, which is a crucial consideration for
Let me digress a moment. At the end of the 1990s, I recall
watching a segment on CNBC where a guest was discussing the
seemingly ideal path taken by
gross margins and its stock price. These two items were overlaid
against each other in a chart and it was an exact fit. Rising gross
margins are a clear sign that a company is generating more sales
from its various cost components. When margins peaked for Dell soon
thereafter, so did its stock price.
Are athenahealth's margins about to slump? It bears watching.
It's the absence of further
gains that will force investors to give this stock fresh scrutiny.
And when investors see that this stock trades for a stunning 80
times projected 2012
per share (of around $1) and around 60 times projected 2013
of around $1.30, they will come to see that this is one of the most
richly-valued stocks on the
-- in a stock market that doesn't look all that healthy anyway.
Investors may also be in for a surprise when it comes to sales
growth, having grown accustomed to 30% growth. That's because
competition is starting to build. For example, privately-held
CareCloud has begun to attract more interest from physicians. "The
company offers a more flexible approach to the revenue cycle and a
much friendlier and intuitive user interface," according to
analysts at Auriga Securities.
Insiders have already voted with their feet. They started
selling this stock back when it was in the $50s and have been
selling ever since. Since June 2011, insiders have sold more than
16 million shares. They now control around 2.5% of company stock,
less than half of what they owned a year ago.
Risks to Consider:
This is already a heavily-shorted stock, with the current short
interest of 9 million shares representing 19 days of trading
, so you may need to ride out a
if you decide to go short.
Action to Take -->
So what does the downside look like for this stock? Analysts at
Sterne Agee see it falling from a recent $80 to $68 because they
suspect sustained future growth targets may be hard to come by.
Auriga's analysts see shares falling even lower to just $58, or
more than 25% below current levels. This price equates to 46 times
projected 2013 EPS of $1.26.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.