Health Catalyst (HCAT)

Healthcare data analytics company Health Catalyst (NASDAQ:HCAT) reported Q3 CY2025 results beating Wall Street’s revenue expectations, but sales were flat year on year at $76.32 million. On the other hand, next quarter’s revenue guidance of $73.5 million was less impressive, coming in 1.7% below analysts’ estimates. Its non-GAAP profit of $0.06 per share was in line with analysts’ consensus estimates.

Company Overview

Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.

Organizations generate a lot of data that is stored in silos, often in incompatible formats, making it slow and costly to extract actionable insights, which in turn drives demand for modern cloud-based data analysis platforms that can efficiently analyze the siloed data.

Health Catalyst's competitors include industry-agnostic analytics companies like IBM, Microsoft, Snowflake, and Tableau CRM; EHR providers such as Cerner Systems and Epic Systems; and healthcare-specific analytics vendors including Optum Analytics, Premier, Arcadia.io, Strata Decision Technology, Craneware, Innovaccer, and Intersystems.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Health Catalyst grew its sales at a 12% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Health Catalyst’s recent performance shows its demand has slowed as its annualized revenue growth of 4.4% over the last two years was below its five-year trend.

This quarter, Health Catalyst’s $76.32 million of revenue was flat year on year but beat Wall Street’s estimates by 1.7%. Company management is currently guiding for a 7.7% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 3.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Health Catalyst’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Health Catalyst’s products and its peers.

For software companies like Health Catalyst, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Health Catalyst’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 47.1% gross margin over the last year. That means Health Catalyst paid its providers a lot of money ($52.86 for every $100 in revenue) to run its business.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Health Catalyst has seen gross margins improve by 0.7 percentage points over the last 2 year, which is slightly better than average for software.

Health Catalyst produced a 49.5% gross profit margin in Q3, marking a 4.7 percentage point increase from 44.8% in the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Health Catalyst’s expensive cost structure has contributed to an average operating margin of negative 29.2% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Health Catalyst reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Analyzing the trend in its profitability, Health Catalyst’s operating margin decreased by 1 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Health Catalyst’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Health Catalyst generated a negative 22.9% operating margin. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Health Catalyst’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10.4%, meaning it lit $10.40 of cash on fire for every $100 in revenue.

Health Catalyst burned through $5.27 million of cash in Q3, equivalent to a negative 6.9% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but it’s still above its one-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Health Catalyst burned through $32.87 million of cash over the last year. Although the company has $172.1 million of debt on its balance sheet, we think its $91.54 million of cash gives it enough runway (we typically look for at least two years) to prioritize growth over profitability.

We were impressed by how significantly Health Catalyst blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year EBITDA guidance exceeded Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed and its EBITDA guidance for next quarter fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded up 1.6% to $2.90 immediately after reporting.

Updated: December 4, 2025 at 9:22 PM EST

Before deciding whether to buy Health Catalyst or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Health Catalyst doesn’t pass our quality test. First off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. On top of that, Health Catalyst’s declining operating margin shows it’s becoming less efficient at building and selling its software, and its operating margins reveal poor profitability compared to other software companies.

Health Catalyst’s price-to-sales ratio based on the next 12 months is 0.6x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $3.94 on the company (compared to the current share price of $2.69).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.