Shareholders of Health Catalyst would probably like to forget the past six months even happened. The stock dropped 48.7% and now trades at $1.56. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Health Catalyst, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Health Catalyst Will Underperform?
Even with the cheaper entry price, we don't have much confidence in Health Catalyst. Here are three reasons you should be careful with HCAT and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Health Catalyst’s billings came in at $71.98 million in Q4, and over the last four quarters, its year-on-year growth averaged 4%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Health Catalyst’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Health Catalyst’s products and its peers.
3. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While Health Catalyst posted positive free cash flow this quarter, the broader story hasn’t been so clean. Health Catalyst’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 6.4%, meaning it lit $6.43 of cash on fire for every $100 in revenue.
Final Judgment
Health Catalyst falls short of our quality standards. After the recent drawdown, the stock trades at 0.3× forward price-to-sales (or $1.56 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
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