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Athena's Big Quarter Spells Trouble for Short-Sellers' Thesis

NEW YORK (TheStreet) -- David Einhorn must have an Epic headache today.

The short-seller battling with electronic medical-records darling Athenahealth (ATHN - Get Report) suffered a blow late Thursday, when Athenahealth reported second-quarter earnings that beat Wall Street estimates by 10 cents a share and topped revenue estimates by $4 million at $185.9 million.

The fight over Athena's shares is several fights in one. The simple one is whether the shares, trading at more than 100 times even "adjusted pro forma" earnings estimates for this year, are unconventionally expensive.

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Of course they are -- just as Amazon (AMZN), (CRM) and Netflix (NFLX) have always been expensive, for all the predictive power that had.

The most important fight is whether health care is really moving in the direction Athenahealth CEO Jonathan Bush says it is -- toward leaner, smaller, nonhospital-based providers who will reform the $3 trillion industry from the grass roots up.

Athenahealth's shares popped $8 in after-hours trading following the earnings release before settling back to $128, just above where they had closed minutes before the report.

The stock has been all over the map Friday morning, however, dipping to less than $119 before rebounding to about $123, but this is not really a problem.

One primary issue, Jefferies analyst Dave Windley writes Friday morning, is concern that Athenahealth added just 1,151 providers for its electronic medical records service, about 300 short of expectations.

Actually, there's a straightforward explanation: Summit Medical Group was expecting to go live by June 30, but its 300-plus doctors and nurses are now targeting July 28. The enterprise software business is always a bit lumpy, but tends to smooth out over time.

Einhorn's Athenahealth short position hit the news in May, when he argued that Athenahealth would be wiped out by Epic Systems, a privately held company selling very expensive client-server based software to hospitals, which in turn try to induce affiliated doctors to use the hospitals' networks.

Athenahealth shares traded as low as $97.30 in the wake of Einhorn's talk, in which he said the stock might be worth as little as $14. Before his announcement, they were changing hands around $126.

But the Epic argument is exactly what Athena's quarter blasted out of the water. The quarter bolsters the idea that health care investing for the next five years will be primarily about finding companies, some as big as UnitedHealth Group (UNH), that are nimble enough to exploit Obamacare's incentives to minimize hospitalizations and cut costs.

Athena's numbers showed the number of doctors using any of its systems (for collections, electronic medical records, or running portals for doctors to communicate with patients) rose 26% in the quarter, to 43,858. But the real tell was the number of very large physician groups -- the ones that tell hospitals what they're doing, contra Einhorn, and are moving services to outpatient settings -- on that list.

Like Ascension Health, which has 4,000 providers and went live in the quarter. Or Health Management Associates, a 900-doctor unit of Nashville-based Community Health Systems (CYH).

Or Summit Medical, the biggest practice in New Jersey and a company big enough to be overflowing Dun & Bradstreet's former corporate headquarters. They've used Athena for collections for a few years and are going live on its other products this quarter. I asked SMG's vice chairman -- who happens to be my doctor -- if Athena will get wiped out by Epic. He laughed. 

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