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Why HealthStream, Inc. Stock Skyrocketed

By Sean Williams - Jul 22, 2014 at 1:00PM

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HealthStream rockets higher after delivering a better-than-expected second-quarter earnings report. Find out why I'm not nearly as keen on this move higher.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of HealthStream (HSTM -1.16%), a software-as-a-service provider to the health care industry, roared higher by as much as 22% after reporting better-than-expected second-quarter earnings results after the closing bell last night.

So what: For the quarter, HealthStream delivered revenue growth of 33% to $42.5 million, although its EPS dipped modestly to $0.08 from $0.09 in the year-ago quarter. Specifically, HealthStream saw its most robust sales gains from its cash-flow-friendly subscription-based solutions, which produced a 42% sales improvement to roughly $9.6 million, and its workforce development solutions which grew by 37% to $9.3 million. Comparatively speaking, Wall Street was anticipating just $41 million in revenue and a profit of just $0.07 per share.

Looking ahead, HealthStream is projecting 26%-29% revenue growth for the full-year (or roughly $167 million-$171 million) which is right in-line with the Street's current consensus. Full-year operating income, however, is expected to fall by 2% to 11%.

Now what: Handily topping Wall Street's estimates is always a way to win back investors if your share price has been in a funk. Then again, projecting a full-year decline in operating income, even if it's to push your software products away from licensing and toward a consistent cash flow subscription-based model doesn't sit well with me -- at least in the context of HealthStream seeing 20% upside in a single bound. On paper the company makes sense as businesses will look to improve workforce efficiency, thus reducing their own long-term costs. But, the reality is that software-as-a-service companies focused in the health care sector are often loftily valued and could be years from realizing their full potential. With a monstrous forward P/E of 65 I'm more than happy passing on HealthStream here and waiting a few more quarters to reevaluate it.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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