eHealth, inc. Stock Mixes Risk and Opportunity

eHealth (NASDAQ: EHTH  ) offers a broad selection of Insurers directly to consumers with a national footprint. The company has been experiencing rapid growth and has an attractive financial profile with zero debt. Recently the company delivered lackluster first quarter results, which resulted in a pullback in the shares. eHealth however is still disrupting the historically time consuming and paper intensive health insurance purchase process and has strong growth prospects going forward.

Various strategic choices have proven advantageous for eHealth. The company has focused on gaining traction in the large Medicare market, increasing Medicare as a percent of revenue from 13% in 2011 to 22% in 2013. In the future the company plans to expand its share of the  large addressable market of 25 million individuals to greater than 5%. Additionally, eHealth is growing its share of the Individual and Family Plan Market (IFP), with 800,200 members as of March 31, 2014, which is roughly 62% of their membership. These two markets are huge growth drivers for the company going forward and are largely responsible for the current top line growth.

eHealth operates in the highly competitive market for selling health insurance plans with eHealth's competitive advantage stemming from its first mover advantage and historical investments in its proprietary technology platform. Insurance companies like working with eHealth because of its ease of use and its growing member base, which ultimately become customers of the insurance providers. As eHealth builds the size of its customer base, insurance companies increasingly become reliant on using eHealth versus other competitors. The company also uses its strong relationships with insurance companies to grow its revenue, with 23% of sales coming from Humana and 12% from WellPoint. However, eHealth according to its most recent annual filing appears not to have any issued patents, only pending patent applications. This contrasts with many other large technology companies which have hundreds or even thousands of patents, creating large competitive moats. eHealth's lack of intellectual property is worrisome, but first moving advantage can never be underestimated in the technology sector.

The company has a strong financial profile with analysts estimating that revenue will grow 17% for the 2014 fiscal year. This revenue projection can be beat if the company accelerates it growth of ancillary revenue streams and continues to capture share in the enormous IFP and Medicare markets. Industry consolidation is likely to be mixed for eHealth, given a large percent of eHealth's revenue comes from the large insurance providers, fewer insurers would make the sales process easier. However, consolidation could have a negative impact on eHealth's earnings in that the negotiations around commission sharing could intensify as the larger insurers will have more bargaining power. At the current valuation of 3X forward revenue and 85X forward earnings the stock is not cheap and much of this growth seems already priced in.

If, as the Fed has seemed to indicate, we are in a technology bubble, prudent investors may be able to pick up eHealth when it gets a bit cheaper. eHealth is definitely a novel company though and an interesting blend of a health care and technology investment, so I'd suggest readers dig in a bit deeper with this interesting and innovative company.

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