As the leading private online health insurance marketplace, innovator eHealth (NASDAQ: EHTH) attracted more than 17 million unique visitors last year by combining a wide selection of plans with the level of support provided by traditional health insurance brokers. Customers can research, compare, and purchase health insurance products from more than 170 carriers, all of which are deeply technologically integrated with the eHealth platform.
After a stratospheric run that resulted in nearly a tenfold increase in just over a year, shares of eHealth are finally taking a breather. The stock reached a high of $112.22 on the strength of its July 26 earnings report and has trended downward since. But there hasn't been any news over the past couple of months that suggests a deterioration in the fundamental growth story; it's more likely that traders took profits on eHealth and moved on to other growth names. Now more than 40% off its peak, eHealth is presenting a second-chance entry opportunity.
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Extraordinary quarter is a sign of things to come
eHealth's second-quarter revenue more than doubled, to $65.8 million. That clobbered the Street's expectation of $41.7 million and was largely thanks to the continued strength of the Medicare business, which saw 105% revenue growth. Management also significantly raised full-year guidance, from $325 million at the midpoint to $375 million, which represents 49% annual revenue growth. So what has changed in the two months since the stellar Q2 report? Besides a small amount of insider selling in recent months, the answer is nothing. The strong fundamentals remain the same and the long-term growth story is intact.
eHealth makes money from commissions generated by new health-plan enrollments. While it caters to individuals, families, and small businesses through its flagship ehealthinsurance.com website, its key market is the Medicare space. eHealth is benefiting from an increasingly computer-savvy senior population that has upped its usage of the internet and smartphones in recent years.
Wide, expanding moat is a healthy trait
eHealth's value proposition is simple; it offers an omni-channel experience in a broad health-insurance marketplace, as well as full transparency, comparison shopping, and easy transactions. The consumer-centric, carrier-agnostic platform also comes with agent support. The company enjoys a significant first mover's advantage, having pioneered the online insurance marketplace back in 1997. It's widened its moat by using its technology to scale operations, and the complex platform is a significant barrier to entry for competitors. It's always adding new partners, and there's still plenty of room for more carriers -- which are learning that coming on board with eHealth is essential to staying competitive in today's consumer-empowered health insurance environment.
Medicare market represents an enormous opportunity
A major shift to online purchasing is under way in the health insurance industry as customers demand clarity and simplicity. The technology-driven consumerization of healthcare is giving customers more control, and eHealth is in the driver's seat to capitalize on this trend. Its consumer-centric model is capturing market share from traditional health insurance channels.
eHealth had 521,000 members as of the end of the second quarter. While this number is impressive, it's less than 1% of the estimated 60 million Americans enrolled in Medicare, a group that comprises approximately one-fifth of the total U.S. population. Given that the average commission eHealth earned per customer last year was $320, Medicare represents a $19 billion total addressable market. And demographics are only making that market bigger, as every day approximately 11,000 individuals in the U.S. turn 65 and become eligible for Medicare. eHealth's ability to leverage robust technology with its long-standing carrier relationships to make Medicare shopping easy for seniors should translate to a long runway for growth.
The company's powerful marketing strategy is in great shape, featuring television, email, SEO, paid search, and direct mail campaigns. Despite the multifaceted approach, management has been successful in reducing Medicare-related marketing costs, which declined 20% from 2016 to 2018; Medicare division profits soared from $10 million to $61 million in the same period. The division is expected to bring in $98 million this year, 87% of total company revenue. That said, eHealth's small business segment is also growing, and it has the potential to disrupt a large, highly fragmented market.
A premium health insurance growth story
There is a lot to like about eHealth. Aside from the massive market opportunity, it boasts a strong balance sheet with no debt and a strengthening cash position. The market seems to be underestimating the possibilities for growth in the core Medicare business. Despite a year-to-date return higher than 100% even after the pullback, its valuation of 26 times forward earnings is attractive relative to its digital health peers.
eHealth is well positioned to capitalize on demographic and market trends in health insurance, including the aging U.S. population, growth in Medicare enrollment, and an increase in customers buying insurance online. eHealth's fundamentals are robust, and growth investors may want to schedule a checkup ahead of the company's next earnings report on Oct. 24. Another strong quarter may be the catalyst that recalibrates expectations -- and the stock price -- for one of the more overlooked growth stories in healthcare.
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