What a time it’s been for Health Catalyst. In the past six months alone, the company’s stock price has increased by a massive 48.7%, reaching $1.76 per share. This performance 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? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Health Catalyst Will Underperform?
Despite the momentum, we’re cautious about Health Catalyst. Here are three reasons why there are better opportunities than HCAT, plus one stock we’d rather own.
1. Declining Billings Reflect Product and Sales Weakness
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 $54.75 million in Q2, and it averaged 14.4% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation. 
2. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Health Catalyst, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Health Catalyst’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 51.2% gross margin over the last year. Said differently, Health Catalyst had to pay a chunky $48.84 to its service providers for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Health Catalyst has seen gross margins improve by 5.3 percentage points over the last 2 years, which is elite in the software space.
3. 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.
Final Judgment
Health Catalyst falls short of our quality standards. After the recent rally, the stock trades at 0.6× forward price-to-sales (or $1.76 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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