Over the last six months, Evolent Health’s shares have sunk to $3.96, producing a disappointing 5.7% loss - a stark contrast to the S&P 500’s 9.1% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Evolent Health, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Evolent Health Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid EVH and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Healthcare Technology for Providers company because there’s a ceiling to what customers will pay.
Evolent Health’s average lives on platform came in at 76.1 million in the latest quarter, and over the last two years, averaged 4.1% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. 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 7.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Evolent Health’s $985.4 million of debt exceeds the $142 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $136.4 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Evolent Health could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Evolent Health can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Evolent Health isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 15.4× forward P/E (or $3.96 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Evolent Health
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