Why Athenahealth is on Einhorn's Short List

Athenahealth, along with its peers, is attempting to change the way hospitals do business; but does that mean it deserves its valuation?

May 22, 2014 at 2:30PM

athenahealth (NASDAQ: ATHN) has been targeted by hedge fund manager David Einhorn of Greenlight Capital following his assertion that high momentum stocks are in a bubble. In a letter to his hedge fund's investors, Einhorn stated that he was shorting a basket of high-momentum stocks whose valuations were exorbitant and not sensible based on traditional valuation metrics.

Unfortunately for athenahealth, it's one of those stocks. But what makes athenahealth so overvalued compared to its competitors Allscripts Healthcare Solutions (NASDAQ:MDRX) and Cerner Corporation (NASDAQ:CERN)?

How do the companies stack up?
athenahealth offers back-office operations to medical practices and hospitals through cloud-based computing. athenahealth's offerings include billing management, insurance claims processing, and business intelligence applications that give medical practitioners more insight into their financial progress and quality of care for patients. The company counts over 40,000 health care providers in 48 states as its clients. KLAS, the health care research company, awarded athenahealth the best ranking in five categories in its most recent report. Some of the categories athenahealth was voted the best in were overall software vendor, overall physician practice vendor, and practice management service. KLAS's ratings are derived from the opinions of thousands of health care workers from around the country.

Allscripts provides information solutions, software, and helps connect physicians to promote collaboration in patient care. Allscripts' services are used by over 30,000 doctors in more than 3,500 health clinics, and like athenahealth, many of its services are offered through the cloud. The company's rankings increased in the recent KLAS report with two of its software products, TouchWorks and SunRise, improving their ratings by 11% and 4%, respectively. The company's scores also increased in KLAS's categories of Implementation and Training and Service and Support.

Cerner provides information technology, financial, and consulting services to the entire health care industry. The company's cloud services help health care institutions and businesses to manage their revenues and focus on patient care. Around 9,000 health care facilities-hospitals, doctor's offices, laboratories, and surgery centers-use Cerner's services. Like athenahealth, Cerner was awarded the distinctions of being the best in some of KLAS's categories. Cerner was rated the best in application hosting and was tops in community health care information systems as well.

Einhorn's beef with athenahealth
Einhorn actually said that athenahealth is an efficient business, but its valuation is wildly detached from its underlying fundamentals. In other words, he believes that even a great business has a finite price. athenahealth's CEO, Jonathan Bush, took a defensive stance in response to Einhorn's short. Bush asserted that Einhorn does not understand the company's business, and is comparing it to the wrong peer group. But to whatever degree that athenahealth successfully executes on an operations basis, it does not mean that its valuation should be what it currently is.



Forward P/E

PEG (5-year expected)







Allscripts Healthcare





Cerner Corporation





Data Source: Yahoo Finance

Over the past 12 months, neither athenahealth nor Allscripts has turned a profit. Cerner has, and trades at a P/E of 45, which still looks pretty expensive. On a forward-looking basis, Cerner and Allscripts look pretty cheap compared to athenahealth.

A five-year PEG higher than one could be a sign that a company is overvalued, and each company meets that criterion, but athenahealth really shows its pricey valuation on a PEG basis. athenahealth's PEG is over two and a half times Cerner's at 5.1, and carries a lofty valuation on that basis. The multiple an investor would pay for athenahealth's sales is also extremely high at 6.8, more than twice the industry average of 3.33. Only Cerner comes close on a sales basis with P/S of 6.

The S&P 500 currently trades at a forward P/E of 16.7 and a P/S of around 1.7. All of the companies trade at significant premiums to the market, but athenahealth stands high above the S&P 500 based on these valuation metrics. athenahealth's forward P/E is more than five times higher than the market's, and its P/S is four times the market's. Furthermore, athenahealth's cash flow multiple, based on its price, is about three-and-a-half times that of the market.

It is clear that athenahealth trades at significant premiums to not only the market, but also some of its competitors. This is what Einhorn most likely sees in light of his comments that he thinks athenahealth is actually a decent company.

athenahealth goes down, down, down

ATHN Chart

ATHN data by YCharts

athenahealth's stock has actually been on a steady decline, even before Einhorn's announcement. During the last three months, all three stocks have fallen while the S&P has risen. athenahealth has declined the most, however, falling close to 34% in the past three months.

Foolish takeaway
Investors should take caution going forward as Einhorn warned that athenahealth could fall another 80%. Personally, I'm not confident in the stock either, as its valuation seems way too high given earnings and revenue.

Can even athenahealth keep up with this top stock?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Athenahealth. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers