Accolade: Turning Bullish After Beat-And-Raise Quarter (Rating Upgrade)


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Elevator Pitch

My rating for Accolade, Inc. (NASDAQ:ACCD) is a Buy.

I wrote about ACCD's financial outlook in my earlier October 3, 2023 article for the company. With the current update, my focus is on Accolade's Q3 FY 2024 (YE February 28) financial results and its guidance for FY 2024 and FY 2025.

I have decided to upgrade my rating for ACCD from a Hold previously to a Buy now. Q3 FY 2024 was a beat-and-raise quarter for Accolade, and this gives me greater confidence that the company can realize its financial targets for the long term. Therefore, I believe that the stock's forward Enterprise Value-to-Revenue multiple could potentially re-rate from the current 1.3 times to 1.5-2.0 times in due course based on my valuation analysis.

The Market's Expectations Of ACCD's Third Quarter Performance

Before Accolade disclosed its Q3

In specific terms, the market forecasted that Accolade's top line will decline by -1% QoQ from $96.9 million for the second quarter of FY 2024 to $96.1 million (source: S&P Capital IQ) in the third quarter of this fiscal year. On the flip side, ACCD's normalized EBITDA was estimated to narrow from -$10.2 million in Q3 FY 2023 and -$8.8 million in Q2 FY 2024 to -$6.2 million for the most recent quarter as per consensus forecasts.

I touch on ACCD's actual Q3 FY 2024 financial performance in the subsequent section.

Accolade's Actual Q3 Results Came In Above Expectations

ACCD's Q3 FY 2024 results turned out to be better than what Wall Street had predicted.

Revenue for Accolade increased by +3% QoQ and +9% YoY to $99.4 million in the third quarter of fiscal 2024 as indicated in the company's Q3 results press release. ACCD's actual third quarter top line was +3% higher than the analysts' consensus estimate of $96.1 million, and also above the mid-point of the company's Q3 revenue guidance of $96.0 million.

At its Q3 FY 2024 earnings call, ACCD credited the revenue beat to the "early recognition of approximately $2 million of savings-based performance revenue." In the company's 10-K filing, Accolade explained that it earns certain variable fees from "the achievement of performance metrics and/or the realization of healthcare cost savings resulting from use of our services."

The company's actual third quarter non-GAAP adjusted EBITDA loss was -$4.6 million which surpassed expectations. As a comparison, the mid-point of Accolade's EBITDA guidance and the sell-side's consensus EBITDA forecast were -$6.5 million and -$6.2 million, respectively.

Accolade shared at the company's most recent quarterly results briefing that "cost reductions via the workforce realignment" and a "focus on spend management" have enabled it to deliver narrower-than-expected EBITDA losses for Q3 FY 2024. In other words, ACCD's expense management efforts have paid off.

In the next section, I highlight the changes that ACCD has made to its full-year FY 2024 guidance.

ACCD Raised Its FY 2024 Revenue Guidance And Expects Narrower EBITDA Loss

Accolade revised the company's full-year guidance in tandem with its Q3 FY 2024 results announcement.

Specifically, the mid-point of ACCD's FY 2024 top line guidance was raised from $412 million earlier to $413 million now. The company also changed the mid-point of its EBITDA loss guidance from -$9 million to -$8 million. This implies that Accolade expects to register a reasonably healthy +14% revenue expansion for full-year FY 2024. ACCD also sees its operating loss for the current fiscal year improving significantly as compared to its FY 2023 EBITDA loss of -$36.5 million.

The company thinks that it can perform even better in FY 2025 (March 1, 2024, to February 28, 2025) with an acceleration of revenue growth to +20% and the achievement of positive EBITDA with a 2%-4% margin.

ACCD has strong confidence in its FY 2024 and FY 2025 financial prospects, because of its Q3 FY 2024 results beat, and its solid bookings as well. The company indicated at its recent third quarter earnings briefing that its 9M FY 2024 ARR (Annual Recurring Revenue) bookings have surpassed FY 2023 numbers with expectations of a +20% or better growth in ARR bookings for full-year FY 2024.

Accolade Is On Track To Meet The Rule Of 40

ACCD outlined the company's long-term financial goals at the latest Q3 FY 2024 results call.

Accolade stuck to its earlier FY 2029 top line target of $1 billion which it disclosed at its 2023 Analyst Day. In my prior October 3, 2023 article, I shared my opinion that ACCD's $1 billion revenue goal for FY 2029 is achievable, considering the company's $216 billion Total Addressable Market and the projected high single-digit percentage annual increase in healthcare costs for the future.

The company also revised its FY 2029 EBITDA margin target upwards from 10%-15% to 15%-20%. Accolade highlighted at its third quarter results briefing that "AI and other technology-driven innovations, and the incremental margin impact of customers implementing multiple offerings" have prompted it to guide for a more significant improvement in operating profitability.

As such, Accolade is well-positioned to meet the Rule of 40 (revenue growth of +20% and EBITDA margin of 20%) in time to come, which warrants a positive valuation re-rating for the stock. ACCD's FY 2024-FY2029 top line CAGR is +19.4% based on the company's FY 2024 revenue guidance of $413 million and its FY 2029 sales goal of $1 billion. On the other hand, the high end of Accolade's FY 2029 EBITDA margin target is 20%.

The market is now valuing ACCD at a reasonably modest consensus forward FY 2025 Enterprise Value-to-Revenue multiple of 1.3 times (source: S&P Capital IQ). A rule of thumb is a stock's "fair" Enterprise Value-to-Revenue ratio can be calculated by dividing its operating margin by 10. Assuming that Accolade can meet its FY 2029 EBITDA goal in the 15%-20% range, ACCD's shares have the potential to rise significantly with an expansion of its Enterprise Value-to-Revenue multiple to 1.5-2.0 times on top of revenue and EBITDA growth.

Final Thoughts

I have a favorable view of Accolade's above-expectations of recent third quarter results and its decision to raise its FY 2024 guidance. ACCD's current valuations aren't reflective of the company's top line expansion and operating margin improvement potential, so I have chosen to rate the stock as a Buy.