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Why Inovalon Holdings Shares Are Sinking Today

By Keith Speights - Updated Apr 19, 2019 at 11:46AM

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The healthcare technology company announced a nice Q4 revenue jump, but investors were still disappointed.

What happened

Shares of Inovalon Holdings ( INOV ) were sinking 10.5% as of 11:30 a.m. EST on Thursday. The cloud-based healthcare technology company reported its Q4 and full-year earnings after the market closed on Wednesday -- and investors weren't happy with the results.

Inovalon's Q4 revenue jumped 17% year over year to $136.3 million. However, analysts expected the company to report revenue of more than $145 million. Inovalon's adjusted earnings per share (EPS) of $0.05 for the fourth quarter also was well below the consensus Wall Street estimate of $0.09. 

Finger pointing to healthcare icons.

Image source: Getty Images.

So what

Does it really matter that Inovalon missed analysts' estimates? Not over the long run.

Inovalon continues to have great growth prospects. The company reiterated its full-year 2019 guidance of revenue between $637 million and $657 million and adjusted EPS between $0.41 and $0.47. The midpoint of the revenue range represents year-over-year growth of nearly 23%. The midpoint of Inovalon's earnings guidance translates to a year-over-year jump of nearly 63%.

During Inovalon's Q4 conference call, CEO Keith Dunleavy said that the company had secured all of its significant client contract renewals for 2019 by the end of 2018. The great thing about this achievement is that most of its contracts are for multiple years.

Holding on to existing customers is important, but Inovalon is also picking up new customers at a solid pace. Dunleavy noted that the company signed 108 new clients last year, an increase of 29% over the previous year. He added that Inovalon "now supports 24 of the top 25 health plans in the United States" and continues to attract new specialty pharmacy and life sciences clients.

Check out the latest earnings call transcripts for companies we cover.  

Now what

More than 80% of Inovalon's business is now subscription based. This business model should enable the company to boost earnings rapidly as it adds more customers to its platform.

The main drawback for Inovalon is that its stock already prices in tremendous growth expectations. Inovalon's price-to-earnings growth (PEG) ratio, for example, is a sky-high 6.25. Such a lofty valuation often means higher volatility -- just as we saw with Inovalon on Thursday. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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