Why Are Healthcare IT Stocks So Expensive?

Sky-high valuations abound in this promising industry, but you might be surprised at why.

Motley Fool Staff
Motley Fool Staff
Feb 18, 2016 at 12:04PM
Health Care

Right now, the average P/E ratio of the S&P 500 is around 21 -- meaning investors pay $21 per $1 of actual earnings from a company.

In this video segment from Industry Focus: Healthcare, Motley Fool analysts Sean O'Reilly and Kristine Harjes highlight the outrageous P/E numbers of a few players in the healthcare sector and discuss why they are so much higher than the average.

A full transcript follows the video.

This podcast was recorded on Feb. 12, 2016. 

Sean O'Reilly: Can you give us a rundown on some more numbers, or, what we need to know we're up against if we want to invest in one of these competitors?

Kristine Harjes: I'm glad you brought that up, because one of the most important things to note when you're looking at the space is, these companies are really expensive. I mean, you're not talking about cheap, single-digit, or even low --

O'Reilly: There are no 15 P/Es here. [laughs]

Harjes: Yeah, exactly. Let's see; I have some numbers in front of me. Cerner (NASDAQ:CERN), that's actually the cheap one [laughs]. They've got a P/E of 32 based on 2015 earnings, forward P/E of 26. Then, Epic is private, as we mentioned. You look at another key player in the space, which is Athenahealth (NASDAQ:ATHN); they've got a P/E of 87 based on their 2015 earnings, and a forward P/E of 68. That's huge! This is also a company --

O'Reilly: What's the market assuming? "Oh, yeah, they'll be a monopoly someday, it'll be fine." What? [laughs]

Harjes: Basically, healthcare is the last holdout industry that hasn't modernized its IT, so you're assuming that, OK, this [is a] huge, huge deal, to get all of these records online, and to get functioning computer systems through the healthcare industry.

O'Reilly: Make it efficient, yeah.

Harjes: So the expectation there is that somebody is going to win this. When they do, it's extremely sticky. So they are really intriguing companies; they're just expensive.