Athenahealth Inc. (ATHN) has quite an impressive business.  The company has taken the “Software-As-A-Service” model and applied it to the healthcare industry.  While medical technology has advanced significantly over the past decade, Carl Byers (Athenahealth CFO) told IBD that few advances have been made in the area of business process.

That’s where Athenahealth steps in.  The company provides billing, collections and medical record management for physician practices.  This service allows Doctors to spend more precious time actually treating patients and less time trying to get paid for their service.  Since medical billing is such a detailed and specific process, ATHN has a leg up on competition by bringing its expertise to the table.

In September of 2007, the company came public by issuing its IPO at $18.  It nearly doubled on its first day of trading.  Despite having very little to show in the form of actual earnings, the growth prospects for the company had investors very excited.  The stock eventually topped out above $47 and spent the early part of 2008 trading back down nearly to its IPO price.  The overall market climate has become somewhat hostile to growth companies and multiples on many strong businesses have contracted.

But over the past month, ATHN has bucked the trend.  From a low of $19.19 in late November, the stock has rallied to over $37 – good for more than a 92% gain.  Investors are no doubt encouraged by sales growth of 35% or more for the last four quarters and earnings growth of astounding proportions.  As the market is so apt do do, the current price seems to anticipate these trends continuing into the foreseeable future.

One of the benefits of working with small numbers  is that the percentages look quite impressive.  When a small company turns from losing money to making a small profit, growth estimates can distort reality.  For instance, if a company earns a grand total of $1,000 in a quarter (barely above break even) and then reports gains of $15,000 in the next quarter, can you really expect 1,500% increases over time?  This is a ridiculous assumption, and yet one that the market makes about growth companies time and time again.

So it is with the utmost respect for Athenahealth as a company that I suggest extreme caution when investing in the stock.  In fact, it seems an aggressive trader could pick a good spot to short this name in the next few months.  The fundamental earnings just do not support a stock price in the upper $30’s, and any disappointing news will likely cause a sharp drop in the price multiple.  Please tread carefully when trading this stock.

FD: Author does not have a position in ATHN
ATHN Notes
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