Stock Story -
What Happened: Shares of healthcare software provider Health Catalyst (NASDAQ:HCAT) jumped 40.1% in the morning session after the company reported second-quarter results that narrowly topped analysts' revenue expectations, while EPS beat by a more convincing margin. Adjusted EBITDA and Free cash flow also beat Wall Street's estimates during the quarter. On the other hand, its revenue guidance for the next quarter missed analysts' expectations, and its gross margin shrunk. Overall, this was a mixed, yet decent quarter for the company.
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What is the market telling us: Health Catalyst's shares are very volatile and over the last year have had 41 moves greater than 5%. But moves this big are very rare even for Health Catalyst and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 8 months ago, when the company gained 6.5%, reflecting the broader market's ongoing uptrend, which some may playfully call the Santa Claus rally (a real observed phenomenon where the market tends to drift upwards during the holiday season for reasons such as optimism and year-end tax considerations for funds and investors). All major indices rose, fueled by growing optimism about the Federal Reserve not only concluding its rate hikes but cutting in 2024. Easing inflation has been the catalyst for this change in tone from the Fed.
During the December 2023 Fed meeting, committee members signaled for at least three quarter-point rate cuts in 2024, roughly aligning with market expectations but more accommodative than Fed officials' previous statements. This has set the stage for a soft landing scenario, where inflation comes under control without damage to the economy that could hurt overall consumer demand.
As a reminder, lower rates are good for stock valuations, especially for tech companies where the market needs to discount back cash flows further out in the future. When the math is done to discount these cash flows back to today, a lower assumed discount rate leads to higher present values.
Health Catalyst is down 16.9% since the beginning of the year, and at $7.60 per share it is trading 41.3% below its 52-week high of $12.95 from August 2023. Investors who bought $1,000 worth of Health Catalyst's shares 5 years ago would now be looking at an investment worth $176.92.
