Inovalon Holdings: good value in health technologies (NASDAQ: INOV)
In this article, I will cover Inovalon Holdings (INOV), which is a small healthcare information company that was left behind by the rally of other health technology companies like Veeva Systems (VEEV) and Teladoc (TDOC). I have a screen taped to Finviz that I regularly check for “bargains”, and Inovalon caught my eye because it’s not often in this market that software or technology companies make the list. For those unfamiliar with Inovalon, the company provides a cloud-based platform spanning many healthcare industry players to collect and analyze data. It sounds like the kind of business that should work very well in this environment. However, as I’ll show in the tips section below, Inovalon cut its 2020 guidance, which caused the stock to drop sharply in late October.
(Source: company investor presentation)
The first chart below shows that Inovalon has significantly underperformed Veeva and Teladoc since the start of the year. The second chart shows Inovalon versus Veeva, Teladoc and ETF Global X Telemedicine & Digital Health (EDOC), which launched in late July and has a basket of tech-focused healthcare companies. Inovalon has also underperformed its peers over this period, and I believe it presents good value after the recent sell off due to its lower 2020 guidance. The only reason Teladoc has performed poorly since end July is its merger with Livongo Health (LVGO).
(Chart from Yahoo Finance)
(Chart from Yahoo Finance)
What caused Inovalon shares to drop significantly at the end of October was the fact that the company reduced its revenue forecast for the year 2020. As you can see in the following table showing old forecast, new forecast and comparison with 2019, revenue forecast changed from $675-698 million to $657-668 million. For a software/technology-focused company, a downtrend is not ideal, but as the company explained on the conference call, the revenue downgrade came from non-subscription products and services. Key insights also indicate that 87% of revenue comes from subscription offerings, 10% from services, and 3% from legacy offerings. Both small parts of the business are impacted by COVID-19, but the impact should be less in the future given the continued growth of subscription offerings and COVID-19 which will hopefully begin to slow down in 2021. What the market seems to have missed is that while the company expects revenue to be lower than previously thought in 2020, net income and cash flow are expected to remain the same as previous guidance. data earlier in 2020.
There are two things I like to point out about our revised 2020 guidance. First, $16.8 million of our revenue guidance update is associated with the impact of the COVID-19 pandemic. on our legacy offerings and low-profit non-subscription services. Second, our profitability and cash flow forecasts remain unchanged despite the revenue updates.
(Source: Company Results Transcript)
(Source: earnings press release)
With the 2020 guidance lowered due to issues with minority parts of the business, the future looks bright given that some of these issues are expected to be resolved and there is a long avenue for continued subscription growth. As you can see in the table below, the company expects revenue growth of 12-16% from its updated 2020 numbers, and significant profit growth is expected. net income and non-GAAP net income.
(Source: earnings press release)
As you can see in the table below, subscription revenue already represents the majority of revenue and will continue to grow in the future. As subscription revenue continues to grow, this should make the legacy and non-subscription portions of the business less impactful on forecasts and earnings.
(Source: Inovalon results presentation)
Looking at the technical outlook, the setup appears to be a good setup. I will show three charts that cover the long term, the medium term and the short term. The first chart shows that Inovalon has a support level around $18, and with the stock currently trading at $18.61 at the time of writing, this is a strong potential entry point. The $18 level is important because it is the level below which the stock was lower at the end of 2016, almost returned in 2017, remained around $18 at the end of 2019, was around 18 $ in June/July of this year, and most recently on November 17, the intraday low was $17.92. All of these data points collectively show the technical importance of this price level.
The following chart is a longer term chart showing divergence between the stock and the RSI. The RSI for the recent selloff has fallen below what happened in the March crash, but as you can see the stock has been trending higher since March. This divergence may indicate a change in the recent trend. Therefore, since the stock recently trended lower, it is expected to reverse and the stock to rise. I didn’t draw it on the chart, but you can see the reverse happened when the stock trended higher from August to October, but the RSI trended lower over the same period , and this signaled that the uptrend had the potential to reverse – which it eventually did.
Finally, looking at a much shorter chart period, you can once again see that there is divergence with the RSI. Since late October earnings, the stock was making new lows but the RSI was rising, which is a potential signal that the short-term downtrend is ready for a reversal and the stock may rise.
In conclusion, I think Inovalon is an attractive value play in the health technology space given the future growth track of its subscription business, quality guidance for 2021 versus 2020, due to that the CEO bought over $1 million worth of stock at the end of October, and the technical outlook is attractive. In this market, it’s rare to find a software or technology company that offers good value with the potential for future growth, and I think Inovalon fits that mold.