After watching their shares surge over the past year, investors in technology stock WebMD Health Corp. are starting to feel the pain of volatile sales and increased competition in the health information space.
WebMD shares sank by as much as 10 per cent on Tuesday, even after the New York-based company raised its fourth-quarter profit and sales outlook and announced it would buy back an additional $50-million (U.S.) of its shares.
WebMD provides public and private online portals, mobile platforms and health-focused publications. Its public website is a reference for Internet users providing everything from symptom checklists to news articles on health and health care.
Investors appeared to focus instead on the company's warning that sales activity so far this year "does not reflect year-on-year growth," and could affect revenue growth if the problem persists. Analysts interpreted that to mean that sales were flat, and were also concerned the company couldn't pinpoint the reason behind the change.
"You can't grow revenues if you don't grow sales," said Scott Kessler, an equity analyst with S&P Capital IQ in New York.
Mr. Kessler is one of two analysts with a "sell" on the stock, while two more have a "hold," and one recommends investors "sell," according to Capital IQ data. The analyst consensus price target is $40.50 (U.S.), according to Thomson Reuters.
On Tuesday, the stock closed down $2.38, or 5.1 per cent, to $44.72 on the Nasdaq.
Analysts are cautious now that the stock has run up 170 per cent over the past year, outpacing larger technology firms such as Google Inc. and Facebook Inc., as well as health software company Athenahealth Inc.
WebMD, which generates most of its revenue from advertising and sponsorships across its websites, faces stiff competition from other reference, news and social networking sites.
The company has been in recovery mode since hitting a low around $13 in the fall of 2012, its worst performance since going public in 2005 at $17.50.
The shares were trading around $57 in April, 2011, but began to sink as drug companies pulled back on advertising as a result of patent expirations and regulatory delays for their products. Management changes and a failed attempt to sell the company also weighed on the stock. Activist investor Carl Icahn got involved; by the spring of 2012 he had accumulated a 13-per-cent stake. The investor is known for taking stakes in companies and persuading management to make changes to try to increase their stock prices. The company later unveiled a restructuring plan that included staff and operating cuts.
The stock began to recover and last summer WebMD reported its first profit in six quarters. (WebMD bought back Mr. Icahn's shares for $32.08 per share last fall.) The stock has continued its ascent, hitting a 52-week high of $50.56 last month.
Many analysts believe that will be its peak for at least the next year.
"Despite the outperformance this quarter and guidance for 2014, we believe the company's slower growth relative to the sector makes it difficult to justify its current premium," Goldman Sachs analyst Heath Terry said in a note to clients.
He maintained his "neutral" rating and $36 price target on the stock.
Morgan Stanley analyst Jordan Monahan has an "underweight" on the stock, believing it's overvalued compared to its peers. "WebMD currently trades at premium multiples to Google, despite slower long-term growth, lower margins, competitive threats and mobile headwinds," he said in a note to clients Tuesday.
On the side of the bulls, Stifel analyst Steve Rubis has a "buy" and $55 target on the stock, believing the private portal business the company operates will drive "meaningful growth" in 2014.