MW is Short eHealth Inc. (EHTH US)
EHTH’s highly aggressive accounting masks what we believe is a significantly unprofitable business. Based on variable costs alone, we estimate that EHTH will lose approximately -$135 from each MA member it enrolled in 2019. If also including fixed costs, our per MA member loss estimate becomes -$402.
We adjust 2019 revenue down by $128 million or 25%. We adjust 2019 operating profit down by $263 million due to subjective and misapplied mark-to-model accounting, yielding an operating loss of -$181 million.
EHTH’s persistence assumptions in its LTV model seem highly aggressive when compared to reality. After ASC 606 went into effect, member churn immediately skyrocketed. We conclude that EHTH is pursuing low quality, lossmaking growth while its LTVs are based on lower churn, pre-growth cohorts.
We conclude that the key driver of growth since 2018 has been EHTH’s reliance on Direct Response television advertising, which attracts an unprofitable, high churn enrollee.
To generate this unprofitable growth, EHTH has been incinerating cash, which we expect it to continue to do until this value destruction slows down or stops.
EHTH management is, in our view, running a massive stock promotion. In addition to using aggressive modeling assumptions, they misleadingly downplay the need for ongoing service and retention. This is the crux of how they justify booking multiple years of revenue at one time. Management also manipulates its presentation of churn to be misleadingly low. EHTH appears to be booking multi-year “tail” revenue at the end of each cohort’s estimated life, which is extremely aggressive in light of the significantly elevated churn. While publicly comparing EHTH to Expedia and Zillow, insiders have sold $34.9 million of shares since the beginning of 2019.
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