Athenahealth: ‘Bubble Stock’ or Bargain?

Yesterday, David Einhorn offered up a bearish take on Athenahealth (ATHN)–even calling it a “bubble stock”–at the Sohn Conference. Today its shares are paying the price, even as analysts try to support the stock.

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The defense calls Leerink’s David Larsen and Chris Abbott:

We continue to be positive on shares of [Athenahealth], as (1) we believe [Athenahealth],  is a true cloud-based HCIT company with deep functionality, (2) while [Athenahealth], also provides a service, this is a very unusual and complicated service that is performed in conjunction with a very sophisticated EMR and billing and AR solution, (3) Epic clearly dominates upstream but we believe there is plenty of room in the community hospital space for [Athenahealth], to win share, (4) [Athenahealth], clearly chooses to reinvest revenue growth back into the business, in order to be able to maintain ~25% y/y top-line growth. We remain positive on [Athenahealth], and our checks indicate that although we’re moving through the stimulus program, there is still a significant professional EMR replacement market opportunity. The HITECH Act may have been signed into law in early 2009, but healthcare reform – in our view – will last for decades.

Citigroup’s Garen Sarafian thinks Einhorn is wrong about Athenahealth’s margins:

Einhorn mentioned operating margin estimates are too high and that similar companies to Athenahealth have margins around 10%. Our expectations aren't that much higher, as we estimate Athenahealth will finish 2014 with adjusted operating margins of 10.3%, increasing to 11.4% and 12.0% in 2015 and 2016, respectively. While we expect some margin expansion, our absolute margin levels are in-line with other [software-as-a-service] peers 2014E operating margins including: Medidata (MDSO) at 8.9%, Salesforce.com (CRM) at 10.3%, and LinkedIn (LNKD) at 13.8%. While not expecting significant margin expansion in the near term, we expect Athenahealth's margins to expand in the future, driven by declining marginal costs associated with adding additional providers to its user base. Additionally, as the top-line growth slows, we expect the company to cut back on its investments, allowing earnings to flow through the bottom line.

Shares of Athenahealth have plunged 15% to $107.98 at 2:41 today, while Medidata Solutions has fallen 4.6% to $36.86, salesforce.com has dropped 3.1% to $51.99 and LinkedIn has declined 5.2% to $142.95.