Over the course of several posts I will substantiate the proposition that a fair price for Athena is less than $40 and also a case for why it will get there within several months.
I will also make the case for why there is a very low probability that there is much more upside.
Sentiment: Strong Sell
Picked up a few shares of Athenahealth Inc. This is WAY over sold and undervalue, i bet the assets of this company are worth more than the share price! 7% drop in one day??? ARE YOU SERIOUS!! There is nothing better than a dirty deal!! This is steal, i will hold my position at for least a 5% gain. Listen people is a perfect set up for a swing trade. All the indicators (and people :P ) are screaming for a buy!!
Sentiment: Strong Buy
Audit committee board member announces he will not seek re-election at annual meeting. Hmm.
Athn down over 25 points and in my opinion headed much further down. I will cover at 40. I think it should go to 20. Another smart guy thinks 12. The two issues are that the longs have no clue what Athena software is and is not. Same for the idiot analysts. And the market will ultimately reflect the truth. Second issue is the insane numbers they post of which there are two types....legit ones that prove the structural problems and the SEC sanctioned fake ones that insanely add back into profits all stock based compensation. It is insanity. The SEC should be jailed for allowing it and the news services and analysts should be spanked for even covering the stock.
One day he SEC is going to allow crooks to cite a financial parameter they will name EBITLOBS. Which will be Earnings Before Interest, Tax and Lots of Bad Stuff.
Obviously the three and a half people who look at this board now know that I was right about the numbers. They may not yet know why I was right. And that is probably because they are not smart enough to know or because they are wishful thinkers. Most people who invest their money do not have reasons for investing; instead they have wishes for investing…hopes.
The question now is, Where from here?
There has been relatively huge volume today and down significantly. Jeffries has a new target of $60. Based on what? They do not say. Yesterday what was their target? Companies like Jeffries are like people who turn on their turn signals after the accident has happened and before the po-po show up.
The press release comments by Jonathan Bush, if you speak English fluently, probably left you scratching your head. I read them over and over. It is obvious he is in Athena due to his family connections and political pull just like his cousin became President of the United States. The question is where the hell is Jonathan’s Dick Cheney? Everything Jonathan Bush said in his comments reminds me of his cousin talking about going to Mars in the middle of one of his State of the Union speeches. Start two wars, create more Medicare entitlements, and, oh yes, go to Mars. Not only did the English not parse in Jonathan Bush’s comments but his subjects were alarming. He mentions his new incubator business (that is designed to keep his programmers excited and informed) as a primary reason for investing in his company. As if the company is now a CMGI or Safeguard Scientific.
The trading this morning is in hundred block shares. The hopelessly over-subscribed institutions cannot get out. Bush and company have steadily been selling shares all year, some tens of thousands of shares each transaction. But they are stock option shares. They get them at one half or one tenth of market prices and sell them immediately. Thus their interest has always been the current stock price and not the long term health of the company. That is the whole thing that is wrong with Wall Street. They do not get paid for good internals. They get paid for transient good stock prices.
Jeffries is saying they do not think the price will get much below $60 while shareholders wait for a December conference in which the company gives 2013 guidance.
Is that disingenuous or just dumb? Who knows. The numbers demonstrate a structural problem. Whatever lies beneath the hood of this company does not scale. As a matter of fact it demonstrates adverse economies of scale. That means that the more revenue it grows the lower the profit margins as a percent of revenues will become. As it grows each transaction becomes more expensive, not less expensive. That is a structural issue. I imagine it has to do with three things: their software, their sales expense and the diminishing prices one can get in the market place. Of these three things the only thing that typical execs who understand nothing about the software they have but do understand the market place and their sales expenses can do is reduce sales and marketing expense. But companies in situations like this rarely do that. Rather, when they face these structural issues they do not reduce their sales organizations, they increase them. Hail Mary passes. There is nothing more seductive in life than ignoring the problems you do have and pretending you have problems you don’t have. It is the child in us.
On another subject, this company likes to brag that they have no debt. That means that they raised all their money by selling equity. Why would you sell equity if you thought your equity was undervalued and not overvalued? You would keep your equity and borrow money. They sold equity because they thought their equity was overvalued and because you do not have to pay equity back.
How do the institutions that seem to hold 35 million of the 35 million shares that are outstanding get out? I imagine it will not go over the counter like your trades and mine. It will happen at the end of a day and be a private deal. You will wake up in the morning and read an announcement. And if the little shareholders are lucky the new strategic buyer on the other side of that deal will be unenlightened and will be acquiring the position for some C-level simplistic strategic reason that makes them take leave of their senses, as in when GE bought IDX.
In the meantime the stock will drift down from these hundred block trades. There is one poster here who believes the stock is worth around $10 at a P/E of 12. I said $20 and I said my target was $40. That other poster is fundamentally correct. My targets are simply trading targets.
Sentiment: Strong Sell
The stock closed on Friday at $85.80 today on average volume. Very steadily dropping over the course of the last month or so. For chartists, an unbroken sequence of lower highs and lower lows. An orderly retreat, but a retreat nonetheless. And it is now down to a current P/E of 180 or so.
Athena senior management is not ignoring this. There seem to be almost no posters but I guess if you have 120% institutional ownership and only 120 or so stockholders the only people who could post here are institutions (who do not post) or employees (who dare not post). But I am certain they read. Some smugly, some furtively, some pruriently.
So what has Athena done to reassure their stockholders (and, possibly, themselves) about this steady stock price retreat? They let George Bush’s cousin, the guy who provided the banking connections for the other guy who runs the place, do a news interview with the Boston Business Journal. The title of the article is “Athenahealth seeks 1 million square-foot HQ”. You can Google it yourselves if you wish. Yahoo does not like links posted in their messages.
I realize this is pretty catty, but the guy had his picture taken in a wild plaid sport jacket that looked like it was stripped from the dead corpse of Pinky Lee of the 1950’s eponymous TV show. But that was less impressive than the interview, which was much more revealing than I think he intended and---until someone screws up his courage to let him read this post--- even realizes now.
I cannot reprint the picture (Yahoo: why not?) but I reprint snippets of the text here. It is, as I said, from the Boston Business Journal.
Health information technology company athenahealth (Nasdaq: ATHN) is looking to triple the size of its current headquarters, to around 1 million square feet.
“We’ve got to expand or move,” athenahealth CEO Jonathan Bush said. “These leases are 10 years, and we’ll need around that much space by then.”
The company — which currently employs 2,200 people, including 900 at its headquarters in Watertown, Mass. — is expanding its workforce. It also needs extra space to support its business development strategy, which includes incubating new health IT startups in-house. Bush said he envisions a culture where an athenahealth software developer could spend one day a week working across the hall with a startup, in order to remain excited about the field and engaged in new cutting edge technologies. …
What can be gleaned from this? Many disturbing things.
First, Bush is worrying about ten years from now. The problem with worrying about ten years from now is that you have to eat now, not ten years from now. Ten years from now is always…..how should I say this?....ten years from now. He has a company that has problems today, this weekend, Monday, next week, and next month and this year and next year. NOT TEN YEARS FROM NOW. So call him a visionary. There is no respectable technology CEO in America (especially ones in sectors with HUGE political risk….can you spell single payer?) that can tell you how many square feet they will need ten years from now. It is as laughable as the idiot who tells you the Grand Canyon is two billion and three years old because three years ago somebody made the mistake of telling him the Grand Canyon was two billion years old. Further, the common wisdom in the virtual 21st century is that office space is cheap and will be getting cheaper.
Second, the guy actually comes out and proves the lack of scalability of his enterprise. He tells you how many people he has employed and that he needs room for three times more people. So how many people does he have? He has 2,200 people. Hmm. He has only 30,000 doctor clients. So he has two thirds of a person per client and at $50K per year per FTE (full time equivalent) he is paying just in people $33,000 per doctor client. Every year. For clients on which his stock price places a market cap value of $100,000 a piece.
And he has been in business for years. The problem with processes that do not scale is that they get less productive with growth, not more productive. More than a decade ago when another company in this field, with a delivery system that was in fact much less scalable than Athena purports to have (but seems not to have), had 140,000 doctors on its system, they had 3,000 people. Do you see the problem?
As a matter of fact, if you go back to the early days of athena you will see that their processes were more productive (more revenue per worker, per unit of input).
It seems to me that the numbers and even Bush himself agree with my thesis. The more business they get, the worse off they will be.
There is another part of this interview that is plain weird, as seems perhaps to be a Bush custom. Like his cousin George W. who had the vivid imagination of an adolescent, he talks about needing space because he is going to start an incubator for healthcare IT startups. He is going to house them so that his programmers can walk once a week across the hall to become excited and instructed on the leading edge of healthcare IT development. This is like the State of the Union Address when George W. who must have seen movies of John Kennedy said something like, “Oh, yes, and we should go to Mars, too!”
A new business line! The new, new thing.
Mr. Bush, cousin of George W: Your problem is not ten years from now. It is now. You have a delivery system that seems not to scale. It is not I who am telling you this. I am just the messenger. Your own numbers are telling you. You are in a sector that has huge political risk due to huge political meddling. The recent spate of sales prior to last quarter was most probably a bubble created by the October 1 deadline for meaningful use just as the spate of sales leading up to Y2K was due to the manufactured problem popularly called the Y2K Bug.
Your competitors are struggling so why shouldn’t you? You have successfully sprinkled Internet Fair Dust on your service offering so that your clients and even your institutions (oddly they are called “smart money”) do not know that you are more than not merely a hosted application. You have not automated much and as your strategic sized clients find out that their back office expenses do not go down they are now renegotiating at much lower rates.
This will become evident to even the dullest of your stakeholders with time unless you divert their attention to some other new, new thing.
I remember when IDX convinced GE and HBOC convinced McKesson to buy them—just before the poo hit the fan. But this poo already seems to be hitting the fan. Look at the share prices of Allscripts and NextGen.
The only thing I do not understand is how the price comes down when you have 35 million shares held by 126 owners and just a couple hundred thousand shares per day trading. It is such a strange fact. I am not a stock guy. I am just a business operator guy. I understand how the price goes up. A miniscule number of shares creates the upward movement because the overwhelming majority of shares are in strong hands that do not trade. Perhaps that is also the way they come down. Yet, any of these huge institutions could soak up the downward pressure and keep it from going down too far and the price they would pay for the fundamentally over-priced shares they were buying would be more than offset by protecting the price drop on the shares they already own. But how long can they keep doing that? Until there are no more shares left in weak hands?
And then what? Go private? Institutions are not operators. They are speculators.
All you need is for one institution to cut and run, I think, and the price will plummet.
But the details while interesting are not important. The share price is wildly too high and reality will prevail. The poster here who six months ago said short at will (from a much lower price point) was right then and yet if you had shorted then you would have been hurt. He was six months too early. It is hard to get in at the bottom followed by out at the top---or, in the case of shorting, out at the top followed by in at the bottom. You need to have the power of your convictions.
Sentiment: Strong Sell
I forgot to mention another basic immutable fact that would tend to cause alarm for people who own or buy Athena stock. Athena provides services for 30.000 doctors. Just before the end of the Internet Bubble and the mad crush of business caused by what was called by idiots on Wall Street as the Y2K Bug (the year segment of dates in software were two digits, not four digits so that they would interpret the year after 1999 as 99 years before 1999, not one year later) the idiots on Wall Street counseled companies that provided medical billing systems to doctors that their enterprises could go public and value themselves at $10,000 per doctor.
Companies did go public and that $10,000 per doctor drove the rush to buy. With disastrous results.
Athena has a market capitalization of $3 BILLION and 30,000 doctors, which comes out not at an impossible 10,000 per doctor but rather an astounding $100,000 per doctor.
IS ANYBODY HOME?????????????????? How the hell can anyone justify that? How can it even be in the ball park? It cannot.
At a $10,000 per doctor valuation Athena should have a market cap ONE TENTH of what it has, meaning the stock should sell at $9 per share. I have a target of $40 and have said it could justify $20 given its odd mix of services it provides and the misperception among the stock buying public and even its clients as to what they think it provides.
But there is no way that any provider of data processing services to doctors can be worth $100,000 per doctor. There are some doctors who are not worth at the end of the year $100,000 per doctor and they are the doctor.
This stat is the only stat you have to know. Something is wrong. Either they have 300,000 doctors, not 30,000 or the market cap is wrong. There are only 750,000 doctors billing in America so I doubt they have 300,000 doctors and are bragging about 30,000. The market cap is wrong and the only way that can correct is for the stock price to plummet.
How it plummets is the interesting thing given that the total number of shareholders would seem to fit into a large living room. It is almost not a public company.
I doubt that the owners of the stock can just sit on it like the poor sots who bought silver 40 years ago at $49 per ounce. It will have to come down to a sensible price. In order for that to happen the current owners will have to sell. The market is terribly illiquid and especially when the bad news starts to happen.
It is going to be interesting. This may be the medical sector data processing stock price bubble of all time. How can the shareholder get the return his $100,000 per doctor investment requires?
Sentiment: Strong Sell
I think the nail in the coffin is that most people who buy stocks like this that have the scent of the Internet on them think that all they need is volume and profits will scale dramatically. A Facebook like phenomenon. But if that were true then you would begin to see it right away in the percentage that profit is of revenue. When your costs are fixed the profit as a percentage of revenue rises dramatically with increases in revenue and the absolute values are staggering. But this company already brags about having 30,000 clients and has a net profit margin as a percentage of revenue just shy of 6%. And it has not gone anywhere in five years. If anything a bit down. A 6% margin consistently over revenue growth of several hundred percent means it does NOT scale. Thus you cannot expect bigger margins from additional sales.
So where does the pop come from if not from more sales?
I don't know. You tell me. Nowhere is my guess.
The bottom line is that the people who are selling the stock have sold the buyers of the stock on an Internet myth and that ultimately reality will sink in.
This stock price is a ridiculous bubble that will burst. Recent put option activity points to a recent concern that the numbers coming out later this month will be underwhelming. I am sure that is true. But I am also sure that the secular trend will confirm that and that the bottom will be a long way off from what happens with the dissemination of these quarterly figures. I do not buy options because I am not a trader. Options expire.
This company has very significant variable expenses which would belie their desire to be associated with some sort of computer like scale. Maybe they have little men running around inside their computers doing the actual work. Or maybe they have a huge sales force that is paid too much money. I don't know and I don't care. The numbers do not lie. The model does not scale. More business will not solve that problem. It will only make underline the problem.
Most people have no good reason to buy a stock. Even most funds. Even without a good reason to buy a stock you can be lucky. The movement of this stock price has been all story and there has not been a shred of evidence in the numbers to support the story. But most people like to get in before the stock pops. Then they dont like to get out when it is high because they think it will go even higher. Lots of smart shorts get killed because there seems to be a larger supply of idiots buying than they imagine.
But I think this is at the beginning of the end of the road. The promotion of this company as it reelates to a found being George Bush's cousin is just one example of the irrelevant data points that has driven it. Unless this Bush plans to bomb a country and get the logistics contract being related to George Bush would seem to me to be at the best irrelevant and at the worst alarming.
In the 1970's the Nikkei was selling for 80 times earnings and scraping 35,000. Today it sells for 9,000, over FORTY YEARS later. This company has more expectation built into it than does Facebook, which has a business that requires a fraction of the operational issues that this company does---and can scale. Not that I am a buyer of Facebook. I don't buy the companies run by sociopaths with Asperger's Syndrome. But look at Facebook. All the supposed brains behind it. They simply screwed over the stock buying public. And the funds that bought into it were just as dumb.
The fact is that the overwhelming percentage of stock buyers lose money and a few make money and that includes money managers. Money managers are people who manage your money until you do not have anymore and then they manage someone else's. I do not know why two dozen institutions bought this stock and doubt they do either.
But they have made a fortune. Now the issue is how do they realize it? How can they get out at the top when they own 118% of the float (the easily available stock). I have no clue. But I do know they cannot eat the stock so at some point they will have to sell. In fact they cannot even buy more to create more upward momentum to create a greater market to sell into because they seem to have gathered most of the stock already. Kids with eTrade accounts are not going to soak up 35 million shares.
It is a curious situation and the fact that the third quarter numbers are coming out and that this is portfolio balancing season will most likely provide an interesting spectacle..
End of posts.
Sentiment: Strong Sell
The only metrics most shareholders like to see are the per share stats. This is a bit naive in that you can drive up and drive down per share stats without maneuvers that have nothing whatsoever to do with the operating dynamics of the company. But in this case there is not much of that going on here so just to make it simple i will use per share stats.
Athena states they made GAAP net earnings (GAAP is Generally Accepted Accounting Practices) of
24 cents in the first half of 2011 but only 18 cents in first half of 2012. For just the second quarters GAAP net earnings were 14 cents in 2011 and 11 cents in 2012. Does that look like a good trend?
Especially when you consider that July, August and September, the third quarter, is normally the worst.
What has made this quarter even worse for every player in the field is that the subsidies for meaningful use required that purchasers of EHR systems had to be up and running on the systems by October 1 and getting up on these systems after you buy them takes many months. The subsidy per doctor for this year was about $14,000, which is very close to the whole cost per doctor for the software. In some cases it is more, much more. In not too many cases is it less. So that the closer the calendar got to October the slower the sales became for every vendor in the country except perhaps Epic.
Making it worse is the political climate. A lot of docs have decided to postpone not only until next year because they have missed out on the subsidy deadline but they have decided to wait until next year.
Finally, the fact is that Athena historically has not even been an EHR play. It has been a billing system play. They picked up all these small docs who simply could not run billing systems and were tired of running their own back offices. But as time went on the people making these decision realized they needed to have an EHR and they would not make a move to a new billing system that did not have an EHR. So Athena went out and got one.
But now they are trying to go up market like everyone else. Nobody wants to mess around with small practices. They are harder to deal with than larger practices and even if they say yes to salesmen they have small checkbooks. A yes from a five man medical practice is a bushel full of high expectations and a little bit of money while a yes from a large practice is less aggravation and much more money.
But the competition for large practices is a lot higher than for small. Athena has very little credibility in that market, even though they can deliver product more cheaply than GE or Siemens or NextGen would like to. And that is how they are attempting to gain access. By dropping their drawers.
That is why they hosted that vendor conferences in which they give access to their client base to other healthcare vendors who will then pay a transaction fee of some sort to Athena. If Athena does not simply try to program that function.
All of this is what is driving the worsening metrics. The NON GAAP metrics Athena likes to use attempt to add back expenses they incur by issuing stock but whose hide does that come out of? Unlike the United States Government when you pay people in stock you wind up having your shareholders pay directly. It is one thing to have them do that and another then to have them ignore it. they also add back amortization. Amortization is the result of taking and expense and making an asset out of it in the first place.
But bottom line, even if you look at Athena from their NON GAAP metrics they are selling for 50 times earnings estimates and if you look at GAAP metrics they are selling for 100 times earnings estimates.
it is nuts, especially when you know what is going on in the field.
Of course there are only 126 recorded shareholders if you can believe S&P. That explains why there are no posters on this Yahoo board. If that is true. Seems hard to believe but it certainly does comport with the stat that institutions own over 100% of the float.
I would be that most of the shorts are also these institutional longs who are protecting these rather absurd gains and that they recent spate of short selling over the last few days reflects their burgeoning awareness that the market fundamentals are catching up.
Because (and if) the stock is truly in such limited number of hands when the selling starts it should be quite interesting. It could make what happen to Mel Gibson as the Bruce look like nursery school.
I have never seen anything like this before. It will not be a million kids selling their 200 shares. It will be a handful trying to sell 35 MILLION shares. To whom? I have no clue. It boggles the mind.
The only thing I can think of is that the number of shareholders is not 126 buy 126,000 and was stated in thusands. If that is the case then the little guy can start the cascade and there will be enough little guys to sell into for the big buys to start to unload and the fall of the stock can occur in a manner that is not totally without order so that it spooks all trading and it can deflate down to a reasonable value, which I think would be no higher than 20 times GAAP earnings, which would be around $20 per share. I have mentioned less than $40 which would represent 40 times estimated GAAP earnings and 20 times the NON GAAP imaginary earnings.
We will see what happens soon enough.
Sentiment: Strong Sell
Before you can address the financial parameters you have to know what Athena does. And does not do. And you have to understand what the clients think it does and what the buyers of the stock think it does.
The problem is that what people think Athena is, is different from what it really is. Clients think they are buying into a super duper billing service and they will be able to eliminate or reduce their back office staff. This is not true. Athena is for the most part merely a hosted billing system that the client staff must manage and work on.
But the price the clients pay is more is much higher than that. The clients pay a few percentage points less than they would pay a billing service. So the doctors, who have severe attention deficit disorder and since medical school have not pondered a problem for more than 90 seconds, think they are getting a deal. they think they are getting a billing service for less money than a billing service costs.
In fact they are getting merely a hosted billing system for more than a hosted billing system costs.
As Athena moved up market and as EHR became a huge issue (the government was subsidizing them to the tune of $44,000 per doctor over the course of three years) Athena found an EHR to offer.
The EHR is not great. The first year's subsidy is over ($14,000). Thus there is no impetus to buy now until later next year to qualify for the subsidy of the second year. This year you needed to be up and running and provide proof of something called meaningful use by October 1.
Existing clients have discovered that they did not get a billing service and that their back office costs have not gone down. Initial contracts have expired and Athena is recontracting.
Because of the almost cliff like drop off in the marketplace driven by expiration of this year's meaningful use subsidy and the intense competition from all players and the burgeoning awareness among Athena's clients as to what it does and does not do, Athena has been giving away the house with the new contracts.
I know of one existing client they have which is several hundreds of doctors where to get a dozen more of the doctors in that group Athena dropped the price by a third and threw in the EHR for nothing.
That is all you have to know about the pressures they are facing in the marketplace that are easily discernible in their financial stats.
But you need to know this in order to then judge which direction you think the financial stats are going to go.
Another large issue that you need to know is that the insiders own almost no stock in this company. They got out. You bought what they sold. Bill Gates owns a third of Microsoft. Zuckerberg owns nearly 30% of Facebook and other insiders bring the insider total much higher. But the insiders of Athena own less than 2%.
So even if you do not look for more data points why the hell would you, a retail buyer, buy something they refuse to buy? Not only that they refuse to buy but that they refuse to continue to own?
In future posts I will address the ridiculous levels of the financial parameters.
Sentiment: Strong Sell
I did not make clear the extent of the discount to this large client. They did not drop the price of the system to the dozen of so doctors who were newly coming on to the system and give away the EHR to just these doctors. They dropped the price to the whole enterprise. This resulted in a reduction of fees on just this one client of over $1 million per year. And they gave away the EHR to the entire enterprise.
This is just one transaction. Because ATHN is on a subscription revenue model this type of behavior will not show up right away.