MuddyWaters Research shorts eHealth Inc. (EHTH US)

MuddyWaters is a boutique WallStreet Research firm founded by Carson Block. The firm makes its bread by shorting problematic stocks and releasing research hiliting the company’s problems.

Muddy Waters Press Release regarding eHealth

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.

About MuddyWaters

Muddy Waters, LLC is a pioneer in on-the-ground, freely published investment research. Muddy Waters peels back the layers, often built up by seemingly respected but sycophantic law firms, auditors, and venal managements. We pride ourselves on assessing a company’s true worth, and being able to see through the opacity and hype that some managements create. Our research approach is to combine diverse talents, including forensic accountants, trained investigators, valuation experts and entrepreneurs, many of whom have hands-on experience running businesses in the U.S. and emerging markets.

Muddy Waters produces three types of research product: Business fraud, accounting fraud, and fundamental problems. Business fraud reports focus on issuers that have massively overstated their revenues. Accounting fraud reports cover real businesses that boost profits through fraud. Fundamental problem reports discuss opaque businesses that have serious fundamental problems that the market does not yet perceive.