Evolent Health: Let The Bidding Begin

Investment Thesis - Evolent Health (EVH) is rumored to be taken private with a bid valuing the company at approximately $3.8 billion [2] - The current bid implies a valuation of 21x forward free cash flow to enterprise value, suggesting a potential 15$32 per share [2] - The company may still be undervalued, and further bids could emerge in the coming days [2] Evolent's Business Model - Evolent Health provides healthcare services and technology solutions aimed at improving care quality and reducing costs for patients with complex conditions [3] - The company partners with health plans to manage care in expensive treatment areas like oncology and cardiology [3] - Evolent uses data-driven strategies and advanced payment models to optimize healthcare costs, creating value for customers such as insurance companies [3] Revenue Growth and Earnings - Evolent's revenue growth rates are expected to decelerate substantially in the second half of 2024 [4] - The company has a history of modest earnings surprises, with recent surprises ranging from -1.52% to 6.80% [6] - Despite a slight improvement in revenue growth rates in early 2024, the market has been skeptical of Evolent's prospects prior to acquisition rumors [6] Valuation and Financial Outlook - Evolent could be acquired for $3.8 billion, with Elevance Health (ELV) being a potential bidder [8] - The company is targeting$220 million in free cash flow by the end of 2024 and a $300 million exit run rate by year-end [8][10] - Evolent's enterprise value is estimated at$4.5 billion, factoring in $200 million in preferred shares,$600 million in debt, and $100 million in cash and marketable securities [11] - A higher bid of$4.3 billion for equity could push the enterprise value to $5 billion, representing a 23x forward free cash flow multiple [11] Market Reaction and Stock Performance - Prior to acquisition rumors, Evolent's stock was down approximately 15% year-to-date [12] - The stock saw a decline from earlier highs despite Q2 2024 earnings results, but acquisition rumors have sparked renewed investor interest [7] - If acquisition talks fall through, the stock could drop, but the company remains undervalued at 18x to 20x forward free cash flow [14] Potential Upside - A takeover bid could drive Evolent's shares up by an additional 15% in the coming weeks [14] - The combination of a solid business model and the possibility of a lucrative buyout makes Evolent a compelling investment opportunity [14]