Evolent Health has gotten torched over the last six months - since September 2024, its stock price has dropped 71.1% to $8.76 per share. 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 Evolent Health, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Even though the stock has become cheaper, we're cautious about Evolent Health. Here are three reasons why you should be careful with EVH and a stock we'd rather own.
Why Is Evolent Health Not Exciting?
Founded in 2011, Evolent Health (NYSE:EVH) provides services to health systems (e.g. hospitals) and payers (e.g. insurance companies, government programs such as Medicare) focusing on improving care delivery and cost efficiency.
1. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Evolent Health’s revenue to drop by 18.9%, a decrease from its 37.5% annualized growth for the past two years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
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.
Evolent Health broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Evolent Health’s five-year average ROIC was negative 8.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
Final Judgment
Evolent Health isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 14.2× forward price-to-earnings (or $8.76 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
Stocks We Like More Than Evolent Health
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