athenahealth (ATHN) Defended at Wells Fargo

Wells Fargo maintained an Outperform rating on athenahealth (NASDAQ: ATHN) with a price target of $175-$185. Analyst Jamie Stockton said he would be a buyer of weakness, as he responded to a short thesis presented by hedge fund manager David Einhorn or Greenlight Capital.

"We have not seen the full presentation, but our understanding is there are two basic components: ATHN is not really a cloud company and cannot achieve 30% or better operating margin; and Epic is going to eat ATHN’s lunch," said Stockton.

"The claim that ATHN is not really a cloud company, but rather a business process outsourcer (BPO), comes from the fact that as physician practices use ATHN’s billing and EHR software they also get a lot of service (checking insurance claims for errors, processing payments from insurance companies, capturing clinical data like lab results, etc.). There is a BPO component to the ATHN story, but the entire software industry is built on the concept of automating labor-intensive tasks with technology. In ATHN’s case, it automates about 85% of the labor it takes on from physician practices. This allows it to drive a 62% gross margin (heading to 70% over time as new solutions ramp) versus the 25-30% that most true BPOs appear to drive," he continued.

"ATHN does have an estimated operating margin of 10% this year, which appears to be in line with the average BPO--but that is because the company is spending so much on sales/marketing and R&D. The reality is that ATHN has 5% market share in physician practice software/service. It has built a better mouse trap (both web-based technology and the heavily automated service) and it is trying to capitalize on it aggressively, building an almost entirely recurring revenue base with very low churn. Ultimately, the gross margin that is significantly above the BPO industry should also drive operating margin that is significantly above the BPO industry. Put another way, ATHN could drive massive margin expansion next year if it wanted to sacrifice growth. A traditional BPO could not--and for ATHN, it would be a wasted opportunity," he said.

For an analyst ratings summary and ratings history on athenahealth click here. For more ratings news on athenahealth click here.

Shares of athenahealth closed at $126.78 yesterday.

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