Evolent Health (EVH)

Healthcare solutions company Evolent Health (NYSE:EVH) beat Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 22.8% year on year to $479.5 million. On the other hand, next quarter’s revenue guidance of $467 million was less impressive, coming in 1.2% below analysts’ estimates. Its non-GAAP profit of $0.05 per share was 52.5% below analysts’ consensus estimates.

Company Overview

Founded in 2011 to transform how healthcare is delivered to patients with complex needs, Evolent Health (NYSE:EVH) provides specialty care management services and technology solutions that help health plans and providers deliver better care for patients with complex conditions.

The healthcare technology sector provides software and data analytics to help hospitals and clinics streamline operations and improve patient outcomes, often through value-based care models. Future growth is expected as providers prioritize digital transformation to manage rising costs and patient demands. Tailwinds include the adoption of AI-driven tools and government incentives for digitization. There challenges as well, including long sales cycles and slow adoption by providers, who may be resistance to change. Tightening hospital budgets and cybersecurity threats are additional risks that could slow adoption.

Evolent Health competes with other healthcare management and technology companies such as Optum (part of UnitedHealth Group, NYSE:UNH), Signify Health (acquired by CVS Health, NYSE:CVS), and Evernorth (part of Cigna Group, NYSE:CI), as well as specialized care management firms like Magellan Health and AIM Specialty Health.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $2.05 billion in revenue over the past 12 months, Evolent Health lacks scale in an industry where it matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Evolent Health’s 17.5% annualized revenue growth over the last five years was impressive. Its growth beat the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Evolent Health’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 7.1% over the last two years was well below its five-year trend.

We can better understand the company’s revenue dynamics by analyzing its number of average lives on platform, which reached 78.05 million in the latest quarter. Over the last two years, Evolent Health’s average lives on platform averaged 5.3% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, Evolent Health’s revenue fell by 22.8% year on year to $479.5 million but beat Wall Street’s estimates by 2.6%. Company management is currently guiding for a 27.8% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.7% over the next 12 months, an improvement versus the last two years. This projection is healthy and implies its newer products and services will catalyze better top-line performance.

Evolent Health was profitable over the last five years but held back by its large cost base. Its average adjusted operating margin of 5.2% was weak for a healthcare business.

On the plus side, Evolent Health’s adjusted operating margin rose by 1.7 percentage points over the last five years, as its sales growth gave it operating leverage. Zooming into its more recent performance, however, we can see the company’s margin has decreased by 2.6 percentage points on a two-year basis. If Evolent Health wants to pass our bar, it must prove it can expand its profitability consistently.

In Q3, Evolent Health generated an adjusted operating margin profit margin of 6%, up 2.9 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Although Evolent Health’s full-year earnings are still negative, it reduced its losses and improved its EPS by 48.3% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q3, Evolent Health reported adjusted EPS of $0.05, up from $0.04 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Evolent Health’s full-year EPS of negative $0.01 will flip to positive $0.22.

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.

Evolent Health broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Evolent Health’s margin expanded by 3.8 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Evolent Health’s free cash flow clocked in at $6.85 million in Q3, equivalent to a 1.4% margin. This cash profitability was in line with the comparable period last year and above its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Evolent Health’s five-year average ROIC was negative 1.8%, meaning management lost money while trying to expand the business. Investors are likely hoping for a change soon.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Evolent Health’s ROIC decreased by 2.1 percentage points annually each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

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.

Evolent Health burned through $68.67 million of cash over the last year, and its $1.08 billion of debt exceeds the $116.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Evolent Health’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 Evolent Health until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We enjoyed seeing Evolent Health beat analysts’ revenue expectations this quarter. On the other hand, its EPS missed and its EBITDA guidance for next quarter fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 1.6% to $2.85 immediately after reporting.

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Evolent Health, you should also grasp the company’s longer-term business quality and valuation.

Evolent Health isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its operating margins are low compared to other healthcare companies.

Evolent Health’s P/E ratio based on the next 12 months is 12.9x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $8.64 on the company (compared to the current share price of $2.85).

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.