You don't have to buy a biotech, hospital, or medical device stock to invest in healthcare. Some smart picks can be found in stocks of companies that provide tools for other healthcare companies -- for example, healthcare information services stocks.
Three of the best healthcare information services stocks to consider buying in 2017 are athenahealth (NASDAQ: ATHN), HealthEquity (NASDAQ:HQY), and Veeva Systems (NYSE:VEEV). These companies focus on very different segments within the industry, but here's why they're at the top of their respective niches.
Athenahealth: Gunning for the big players
Athenahealth is the leading provider of cloud-based technology to physicians and hospitals. The company has increased revenue by a compounded annual growth rate (CAGR) of 30% over the last 10 years. Even though Athenahealth isn't the new kid on the block like it once was, its management still expects revenue to grow by around 20% annually in the future.
Jonathan Bush, Athenahealth's always-colorful CEO, said a couple of years ago that major rivals Cerner and Epic would "collapse like big black swans." Bush's premise was that these legacy software systems aren't able to support the usability, flexibility, and interoperability that the healthcare industry needs to improve.
Athenahealth's strategy is to leverage the power of its growing network of providers connected on the company's cloud-based platform. The company plans to increase its customers' efficiency and help them grow their market share.
Expanding into other healthcare areas is also important. Athenahealth started out by addressing the physician market but later expanded into the hospital market. Its vision is to build "a unified clinical experience that allows providers to cross environments (e.g., inpatient, outpatient, point-of-care mobile applications, and population health management) without having to log in to different systems."
HealthEquity: Powering the HSA surge
HealthEquity provides a technology platform for consumers to manage health savings accounts (HSAs). The company's revenue increased by more than 40% in both 2014 and 2015. HealthEquity projects similar growth this year.
The company currently serves as the integrated HSA platform for 87 health plans and over 34,000 employer clients. Those health plans include many of the largest in the U.S. As a result, more than one-third of Americans under age 65 are covered by HealthEquity's network partners.
But did Republicans' failure to win support for an Obamacare replacement plan hurt the chances of HSA growth in the future? Not really. HealthEquity benefited from a tremendous increase in HSA usage during a period when the prospects of healthcare legislation other than Obamacare were essentially non-existent.
HealthEquity's CEO, Jon Kessler, stated, "Once you really understand how an HSA plan works, you will never go back to conventional health insurance." As more Americans gain this understanding, HealthEquity will reap the benefits. And if the GOP finally passes an Obamacare replacement, you can bet that HSAs will be a key part of the plan.
Veeva Systems: In the right place at the right time
Veeva Systems is the leading provider of cloud-based software solutions for the life sciences industry. The company claims more than 475 customers, including huge drugmakers and up-and-coming biotechs.
Veeva became the second-fastest software company to reach $500 million in annual revenue. When asked how the company did it, co-founder and president Matt Wallach responded by saying it was a combination of good timing and addressing complex customer needs.
Over the last five years, Veeva's revenue has soared 470%. The company projects 2017 growth of more than 30%. Two key growth drivers will be Veeva's Commercial Cloud and Vault products. Commercial Cloud is the company's core customer relationship management system. Vault is Veeva's cloud-based enterprise content management platform.
Commercial Cloud was launched in 2008, while Vault launched in 2012. Vault's sales growth in its first five years is tracking ahead of the first five years for Commercial Cloud. Veeva is also seeing existing customers implement additional Vault suites after their first year.
These three companies have one other common denominator besides being arguably the best at what they do: Their stocks are priced at a premium. Athenahealth stock trades at 37 times forward earnings. HealthEquity's share price is 60 times higher than forward earnings. Veeva stock trades at 53 times forward earnings.
Lofty valuations can translate to higher volatility. On the other hand, all three of these healthcare information services stocks have been rewarded with premium prices because investors like their potential. In my view, Athenahealth, HealthEquity, and Veeva deserve higher valuations than most and remain solid picks for 2017.