"Sufficient Reason" to Question Bubble
Castlight Health provides enterprise healthcare cloud software that could allow employers to lower their overall healthcare costs, which have spiraled upwards in recent decades and hit corporate bottom-lines. The company priced its $200 million IPO at $16 a share, valuing Castlight at about $1.4 billion. Shares more than doubled in Castlight's first day of trading.
Ted Tobiason, a managing director in the equity capital markets division at Deutsche Bank, said in a March client note that Castlight Health should give investors "sufficient reason" to seriously question an IPO bubble. Tobiason, however, also said Castlight's IPO was indicative of a willingness to invest earlier in a company's life-cycle if it possesses a solution to a large addressable market.
"To some the fact that a company with only $13 million in 2013 revenues and negative gross margins can get a $1.4 billion valuation at IPO only to trade to a $3.9 billion IPO its first day is an indicator that we're in another IPO bubble," Tobiason wrote. "There are sufficient reasons to look at this seriously," he said.
Tobiason said Caslight Health's roadshow emphasized the size of the company's addressable market and the solution the company may offer to employee plans. Employer healthcare spending is at $620 billion, with 30% being waste and a majority of chief financial officers citing that spending as their primary cost concern.
Castlight estimated in its roadshow that the company's addressable market would be $5 billion, possibly a low estimate according to Tobiason, given its cost solutions for employee health plans. An expenditure of 1% of a company's overall healthcare costs on Castlight could lead to savings of 15% of total costs, something that investors keyed on, according to Tobiason's note.
"The pricing and performance of the stock certainly indicates that public investors are willing to pay a substantial premium to get exposure to companies with enormous growth potential and the big dream... As for Castlight, they now have a $3.2 billion market valuation and with that will come a great deal of pressure to perform to the expectations that come with that," Tobiason concluded.
So far, results are likely to have underwhelmed who invested in Castlight's IPO. Now the company has set a tangible guidance from which it can deliver through year-end.
"We at Castlight believe that we are helping enterprises lower their cost of care. In helping enterprises do that, we will deliver a lot of value," Collela said on Wednesday.
-- Written by Antoine Gara in New York