For every Amazon (NASDAQ:AMZN) or NVIDIA (NASDAQ:NVDA) that skyrocketed from penny stocks to “magnificent” stocks, there are dozens that fizzle out and go nowhere.
That is why investing in penny stocks, generally considered those that trade below $5 per share, are a risky proposition and shouldn’t be taken lightly.
But, as history has shown, many penny stocks break out, maybe not to the degree of an Amazon or NVIDIA and become good stocks with rising returns. One that has the potential to do that is Accolade Inc (NASDAQ:ACCD), a healthcare benefits provider.
Heading in the right direction
Accolade is a company that provides customers with healthcare delivery, benefits navigation, and advocacy services through its AI-enabled technology platform that is designed to improve the healthcare experience.
Accolade stock, which went public in June 2021, is currently trading at about $4.08 per share and is down about 66% year-to-date (YTD). The stock had been trading at a high of around $60 per share back in early 2021, caught up in the post-pandemic irrational exuberance in the markets. Since then, the stock has fallen precipitously, including this year, as it had been trading at $15 back in January.
So, what makes Accolade a stock to consider now? While it has declined so far into penny stock territory, it has now become attractive from a valuation standpoint. Also, the company is actually heading in the right direction, as was evident with its second quarter earnings report, which came out Tuesday.
While not yet profitable, it is gradually heading in that direction. In its fiscal second quarter ended August 31, Accolade increased its revenue year over year by 10% to $106 million and reduced its net loss by 27% to $24 million. Accolade topped both revenue and earnings estimates.
On an adjusted basis, it lowered its adjusted EBITDA net loss in the quarter by 68% to $2.8 million and raised its adjusted gross profit by 17% to $50 million, with the gross profit margin at 47.3% — up from 44.2% in the same quarter a year ago.
Profitable by the end of the fiscal year
The momentum from the last quarter is expected to continue throughout the rest of the fiscal year, and beyond. In Q3, it calls for $104 million to $107 million in revenue, which would represent growth on the high side, but is slightly below expectations. The adjusted EBITDA loss is expected to be a $3 million to $5 million, which would be up slightly from Q2.
But for the full fiscal year, Accolade anticipates revenue between $460 million and $475 million and an adjusted EBITDA net gain of between $15 million and $20 million.
“As we enter the second half of fiscal year 2025, we are well positioned to deliver our first full year of Adjusted EBITDA profitability and positive cash flow. Accolade is proving the scalability and profitability of a business model and strategy that is fundamentally designed to improve the lives of millions of people and their families,” Rajeev Singh, Accolade CEO, said.
The company has steadily grown from just 54 clients in 2020, when six made up 75% of revenue, to over 1,200 clients today, with no one client accounting for more than 5% of revenue.
It has grown revenue at an annual rate of 29% over that time and is just scratching the surface of a total addressable market of $416 billion in serving healthcare clients. Its long-term goals are to have an adjusted gross profit margin of between 50% to 55%, and a 15% to 20% adjusted EBITDA margin.
Analysts see big upside for Accolade
Most analysts rate Accolade as a buy, and while some lowered their price targets after the muted growth estimates for Q3, they still like the company’s long-term trajectory.
Accolade stock still has a median price target of $7.50 per share, which would suggest an 85% increase in the stock price over the next 12 months.
In the past, Accolade’s meteoric rise and fall was more indicative of the speculative nature of the post-pandemic market, but now that it has likely bottomed out, it’s rise will be due to its consistent growth and efficiency in a large and growing market space.