Health Catalyst (HCAT)

Healthcare software provider Health Catalyst (NASDAQ:HCAT) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 6.3% year on year to $80.72 million. On the other hand, next quarter’s revenue guidance of $75 million was less impressive, coming in 12% below analysts’ estimates. Its non-GAAP profit of $0.04 per share was in line with analysts’ consensus estimates.

Company Overview

Founded by healthcare professionals Tom Burton and Steve Barlow in 2008, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology to healthcare organizations, enabling them to improve care and lower costs.

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.

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. Regrettably, Health Catalyst’s sales grew at a weak 6% compounded annual growth rate over the last three years. This was below our standard for the software sector and is a poor baseline for our analysis.

This quarter, Health Catalyst grew its revenue by 6.3% year on year, and its $80.72 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 1.8% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 10.6% over the next 12 months, an acceleration versus the last three years. This projection is above average for the sector and indicates its newer products and services will catalyze better top-line performance.

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 45.9% gross margin over the last year. Said differently, Health Catalyst had to pay a chunky $54.07 to its service providers for every $100 in revenue.

Health Catalyst produced a 47.4% gross profit margin in Q2, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, 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 28% 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 be optimistic about its growth, but we have some doubts.

Over the last year, Health Catalyst’s expanding sales gave it operating leverage as its margin rose by 4.1 percentage points. Still, it will take much more for the company to reach long-term profitability.

In Q2, Health Catalyst generated a negative 46% operating margin. The company's consistent lack of profits raise a flag.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Health Catalyst’s demanding reinvestments have consumed many resources over the last year, contributing to an average free cash flow margin of negative 8.1%. This means it lit $8.12 of cash on fire for every $100 in revenue.

Health Catalyst burned through $14.19 million of cash in Q2, equivalent to a negative 17.6% margin. The company’s cash burn was similar to its $2.44 million of lost cash in the same quarter last year.

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 $25.67 million of cash over the last year, and its $172.8 million of debt exceeds the $97.34 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Health Catalyst’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Health Catalyst until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Health Catalyst blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year EBITDA guidance slightly exceeded Wall Street’s estimates. On the other hand, its full-year revenue guidance missed and its revenue guidance for next quarter fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 10% to $3.33 immediately following the results.

Updated: November 8, 2025 at 9:10 PM EST

Before investing in or passing on Health Catalyst, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We see the value of companies addressing major business pain points, but in the case of Health Catalyst, we’re out. To begin with, 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 operating margins reveal poor profitability compared to other software companies, and its customer acquisition is less efficient than many comparable companies.

Health Catalyst’s price-to-sales ratio based on the next 12 months is 0.7x. 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 $4.33 on the company (compared to the current share price of $2.83).

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.