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Buy Castlight Health (from November 2021)

Castlight Health has received an all-cash acquisition offer from Vera Whole Health for $2.05 per share. We're closing our official 7investing recommendation and are sharing our original research report with the public.

January 6, 2022

– Advisor: Dana Abramovitz

Companies: Castlight Health  

Introduction to Our 7investing Recommendation Reports

January 6, 2022: Our 7investing team has a policy that we don’t publicly reveal our official recommendations. Our members subscribe to our service for our research, and we always consider our recommendation reports as proprietary IP. We reserve these reports, as well as our team’s discussion about the stocks during the month when we recommend them, for our paying subscribers.

However, a unique opportunity recently presented itself, which allows us to once again publicly share our research in a way that doesn’t compromise our policy.

Castlight Health (NYSE: CSLT) was the official recommendation of 7investing lead advisor Dana Abramovitz in November 2021. On January 5, 2022, Vera Whole Health announced it had made an official all-cash offer to acquire Castlight Health for $2.05 per share.

We believe this is a win-win for Castlight as a business and also for its shareholders. We also expect the deal will close and do not expect there to be another offer. As such, we are officially selling our shares and closing the Castlight position from our 7investing scorecard.

We also have decided to make our initial November 2021 Deep Dive video pitch with team Q&A publicly available. This is a great opportunity for us to showcase one of our actual recommendation reports, and also give a sneak-peek into our investing process.

As this now-public research demonstrates, each team member wields a deep understanding of their respective domains — we’re not just handing members a list of tickers. We thoroughly and objectively evaluate opportunities and challenges to encourage members to adopt a long-term mindset. The team at 7investing comprises experts in biotechnology, health care, synthetic biology, artificial intelligence, fintech, disruptive innovation, space technologies, and more. If you’re interested in gaining access to seven of these recommendations each month, please subscribe today!

We hope you enjoy our actual November 2021 recommendation report for Castlight Health, which we’ve published in its entirety below. You can also download a PDF copy using the button above.

The 7investing Key Takeaway

Digital health and fitness apps make it easy for us as consumers to think about our health and wellness. We have access to tools that can connect us to our care providers, remind us to eat well and exercise, and even help us relax and sleep better. But with the thousands of health and fitness applications available through app stores and employee health programs, its hard to know which option is the right one for us. With too many choices, we might choose not to do anything for our health or wellbeing at all.

Castlight Health (NYSE: CSLT) helps users understand their different options, choose the one that best meets their personal needs, and fully utilize their health benefits. This helps people live healthier, happier, and more productive lives. Their primary customers are large employers who offer extensive health benefits to compete for employees. Castlight Health helps employees easily navigate their options so they can fully utilize their benefit and provide value to their employer.

The company is in a turnaround stage and is already seeing the benefits of new leadership established in 2019 and expansion into new markets. A 2020 ruling from the Center for Medicare and Medicaid Services (CMS) that requires health care providers to share prices for their services in a shoppable, user-friendly format presents another opportunity for growth as Castlight Health has been helping customers understand and compare the cost of services since its founding in 2008.

This is a very high-risk investment opportunity, but also one with a potential large upside. It is ideal for a long-term investor who can tolerate the volatility of a small market cap and a company in a state of transition. As with digital health applications, there are thousands of different investment options. Read on to see if Castlight Health is the right choice for you.

What Does Castlight Health Do?

Castlight Health helps people utilize their health benefits by understanding what is available, at what level of quality, and at what price so they can live happier, healthier, and more productive lives. Its customers are large employers who are competing for employees and therefore offer extensive benefits packages, as employees are choosing where to work based on the benefits offered. Castlight Health has more recently worked with health plans, like Anthem and Cigna, that have members looking to understand and best utilize the health care options in their plans. Health benefits are valuable only when they are used. Castlight Health provides value to its customers by helping users use all of their health benefits, from fitness and wellness, to finding the right doctor, to understanding the cost of the care, so they can choose the best option for them. All from the palm of their hand.

Castlight Health was founded in 2008 to focus on price transparency and quality. Its aim was to help users find the best value and make the best choices for themselves. Being one of the first digital health companies and one trying to tackle such a large problem, it may have been too visionary. The industry simply was not ready. The company pivoted to serve the needs of the market at that time and focused on cost savings for large employers. In 2017, it acquired Jiff and incorporated Jiff’s holistic Wellness Platform to expand into fitness and wellness. Castlight Health introduced its Castlight Complete application in 2018.

At the core of Castlight Health is its comprehensive data platform where it has collected over three billion records from various sources such as insurers, pharmacies, and behavioral employee assistance programs. The platform integrates data from other health and wellness vendors through APIs and includes data from health and fitness trackers and user-inputted biometrics. Using artificial intelligence (AI) and machine learning (ML), the Castlight Health app delivers personalized information for a better user experience.

Castlight Health delivers all of this information in an easy-to-use mobile app. It sells subscriptions to employers in three year contracts and gets paid a per employee per month (PEPM) subscription fee. It also generates revenue from professional service fees related to the implementation of its services and products sold through its online marketplace.

Castlight Health is able to use its data platform and integration capabilities to create white labeled applications for the health plans it works with. It incorporates health plan specific data to create a single brand experience for health plan members. It recently added Castlight Care Guides, individuals trained in administrative and clinical support. Care Guides extend phone- and chat-based customer support and utilize the data platform to give users an even more individualized user experience.

Users appreciate this care. Castlight Health has a net promoter score (NPS) of 66, which is outstanding for a health care company (Apple has an NPS of 47), and the app has earned 4.7 stars in the Apple app store. With over 260 employers and two health plans as customers, Castlight Health is used by over 15 million people.

Why is Castlight Health a Good Investment?

Castlight Health was one of the first digital health companies and has been growing its database of information since 2008. Being one of the first digital health companies to market, it had to make an extensive effort in educating the industry. As a result, the company hasn’t yet been able to fulfill its potential. But with a new CEO in 2019 and the expansion into health plans, it is working to turn itself around.

The company is providing value to its customers. APIs enable it to integrate with the vast array of employee health and fitness applications so that it can accommodate whatever companies are in a benefits package that an employer might provide. This makes it a more complete navigation solution for its customers. Employers in turn get value when their employees take advantage of their health benefits, so the more extensive the coverage, the more potential value. Customers are getting value. Studies show that when using the company’s most comprehensive package, Castlight Complete, there is 1.4 – 2.5 times user engagement of employee health benefits. Customers are also experiencing cost savings with 6% fewer emergency room visits, a 12% reduction in labs and imaging costs, and around a 2% savings in medical claims.

With the current economy, employers are competing for good employees. In turn, employees are using benefits packages as a determinant when choosing where to work. As such, employers are increasingly adding health and wellness vendors to their offerings. Sometimes, however, having too many choices makes it difficult to find any utility, defeating the purpose of an expensive compensation package. Castlight Health makes it easy for employees to make full use of their benefits.

The company is expanding beyond large employers to include health plans. Health plans have a similar goal of getting members to maximize the health benefits of their plans. Being able to incorporate plan specific information and white label the application gives users a complete, single brand experience. Expansion into health plans also includes individuals participating in Medicare Advantage or Managed Medicaid programs as well as individuals purchasing health care coverage from health care exchanges, bringing the total addressable market to $18 billion.

The company was able to quickly pivot during the COVID-19 pandemic. It used its data platform to assist Boston Children’s Hospital with their project with the CDC. It also collaborated with Google, Amazon, and a variety of public health departments to help people find COVID-19 testing sites.

Castlight Health was founded to make price transparency accessible to users so they could understand the costs of health care and reduce their cost burden. That was in 2008. In 2020 the Center for Medicare and Medicaid Services (CMS) issued a final rule to increase price transparency among health care providers. It started with hospitals in January 2021, is expanding to group health plans and insurers by January 2023, and will include all health care services by January 2024. As part of the ruling, price information needs to be made available in a shoppable, user-friendly format. Given that Castlight Health has been collecting and utilizing this data for over a decade, it is well-positioned to finally fulfill its potential.

The company uses Annualized Recurring Revenue (ARR) as a way to monitor its business and investors can use it as well. ARR is a forward-looking metric that measures the annualized value of subscription revenue from contracts billed in a given quarter. It does not include customers that did not renew, nor does it include new customers that haven’t yet been billed in a given quarter, so it is a moving reflection of the company’s business. While Castlight Health had been operating at a loss for many years, at the end of Q2 2021, ARR increased for a second quarter in a row to $128.2 million. It also achieved its fifth straight quarter of non-GAAP profitability and positive cash flow, suggesting that its work, both in terms of its technology and management, is starting to pay off. The company indicates that it is set up for a positive Q3 — however that earnings report is scheduled for November 2nd, just one day after the release of this recommendation report.

What’s Happening in the Bigger Picture?

There is an extensive variety of health, fitness, and wellness applications and thousands of digital health companies to provide their services. For a consumer, that means there is something for everyone, but it also presents a challenge in how to find the right application, for the right need, the right cost, and at the right time. Castlight Health’s mission is to make it as easy as possible for people to navigate the health care system so they can live happier, healthier, and more productive lives.

Employers want their employees to be happy and healthy because that makes them more productive at work. With increased competition for good employees, benefits packages are a selling point for employers. They are giving employees more health benefits to help them stay healthy and fit, to reduce stress and improve their mental health, and to access the right care when care is needed. But these benefits only work if the employees use them. Castlight Health has shown that use of its application increases use of employee benefits.

With an increased number of digital health applications and a focus on employee benefits comes increased competition. There are companies that focus on helping users navigate fitness and wellness apps, companies that focus on helping users navigate chronic care apps, and companies, like Castlight Health, that provide a more integrated solution. Castlight Health also competes with the status quo — employers that do not choose to add a navigation system to help their employees maximize their benefits. With such a large competitive field, there is also room for consolidation. Castlight Health’s small market cap at the time of this writing makes it a potential acquisition candidate should the field move in that direction.

One thing that has set Castlight Health apart, however, is its emphasis on price transparency from its onset in 2008. Now that the health care industry has finally caught up with its vision, Castlight Health can take advantage of the opportunity to fulfill its potential.

Management and Vision

Castlight Health was founded by a physician, a scientist and a technologist to transform the health care industry. It is a good combination in that each needs the knowledge of the other to best work within the complex health care system. Dr. Giovanni Colella, MD, served as CEO until 2017 and still serves on the Advisory Board. Dr. Bryan Roberts, PhD, is a partner at the venture capital firm Venrock and serves as Chairman of the Board. Todd Park created the initial data platform architecture. He left Castlight Health to serve as the first CTO of the Department of Health and Human Services and then CTO of the United States.

Castlight Health is currently being led by Mauve O’Meara, who was promoted to CEO in 2019 to turn the company around. Ms. O’Meara joined the company in 2010 after graduating from Stanford Graduate School of Business. She led teams in Product Management, User Experience and Product Analytics, and Customer Experience, so she has a full working knowledge of the business. She also was instrumental in expanding the company’s growth to health plans, managing the relationship with Anthem, so she knows how to grow the company into this new direction.

O’Meara is an expert in health benefits and serves on the National Business Group on Health Cost. Prior to Castlight Health, she was a venture capital investor at Highland Capital Partners where she focused on health IT, health care services, and the consumer internet market. She has earned an 84% Glassdoor approval rating from her employees and has retained a great company culture, where people enjoy the opportunity to make the world a better place – 77% of the employees would refer a friend to work at Castlight Health.

What are the Key Risks?

Being a visionary company with a goal of improving the health care system by helping people find the best value for the price has both been good for Castlight Health, but also a burden. As one of the first digital health companies in its market, it has spent a lot of time and resources educating the market and that puts it at risk for being surpassed by some of the newer companies entering this space. As such, the company has been operating at a loss for many years. While it is working to make a turnaround, there is still a risk that revenue does not meet the expected guidance on any given quarter or that the stock market will reactive negatively, making its already small market cap even smaller.

The company has seen successive growth in ARR over the last two quarters, but much of its revenue is tied to a small number of key customers. Should one of those customers fail to renew their contract, that could be a significant loss in revenue. Given that their subscription fees are tied to the number of its customers’ employees, changes in the economy that cause employers to reduce staff or close their businesses could lead to a reduction in revenue.

The digital health market is growing and with it, competition for Castlight Health, including employers that choose not to offer a navigation system. Employers are competing against each other for employees and may move from one service to another to remain competitive. With so many companies in the space, there is room for consolidation. Castlight Health could be acquired, acquire a synergistic competitor, or two companies could consolidate to become a stronger competitor.

At its core is its data platform, which relies on third parties for data. Castlight Health also relies on third-party partnerships to expand its ecosystem. If there is a problem with the integration of a partner’s solution, that could reflect poorly on Castlight Health.

Finally, the health care industry is highly regulated and can change at any moment. While Castlight Health doesn’t store data that puts it at risk for HIPAA regulatory violations, its partners do and that imposes some risk.

Thoughts About Valuation

Castlight Health is in a state of turnaround and could be a good opportunity for a patient and risk-tolerant investor. Its market capitalization is small, making it volatile to market fluctuations. While not quite profitable, it is generating operating cash flow and has been improving its operating margins over successive years. The forward-looking metric that the company uses to monitor its business, its Annualized Recurring Revenue (ARR), which measures the quarterly revenue it gets from customers in contract, has also increased in successive quarters.

The company is currently trading at less than two times revenue, which could be considered drastically undervalued if it is able to turn itself around. That includes expanding to include more health plans, renewing existing customers, and taking advantage of the new price transparency ruling. Given that the company was valued at $1.4 billion when it initially went public in early 2014 — compared to its market cap of just under $300 million today — there is obviously potential for growth. As investors, we need to monitor to make sure Castlight Health can live up to its potential.

What Should We Be Watching?

The health care industry is slow to change, but it is moving to promote health, wellness, and most importantly value for users of the health care system. Digital health companies are helping users take advantage of the changes. Castlight Health is helping users take advantage of all the companies they can access through their health benefits programs. We should look at the follow metrics to monitor the company’s growth.

  1. Annualized Recurring Revenue (ARR) – This forward-looking metric is something Castlight Health uses to monitor its growth as well as customer retention. It has seen successive growth in this metric over the last two quarters and investors should watch to make sure this number continues to grow.
  2. Expansion into health plans – Castlight Health has already proven value to health plans through its relationship with Anthem. It plans to expand its business by growing further into this market, which also includes Medicare Advantage and individuals purchasing insurance through health care exchanges. As investors we should look to see the addition of health plan customers as an indicator of business growth.
  3. Adoption for price transparency functionality – Castlight Health has been collecting and reporting on the cost of health care services since its founding in 2008. With the new price transparency ruling by CMS in 2020, the industry has finally caught up to its vision. Castlight Health is now in a position to become the market leader if it takes advantage of this new ruling. We should be looking for Castlight Health to promote its price transparency functionality and use it to grow its business.

Disclosure: As of November 1, 2021, no member of the 7investing team owns shares of Castlight Health.

Deep Dive

Watch Lead Advisor Dana Abramovitz pitch Castlight Health to the team. You can also read the transcript and download the slides.

This conversation originally took place on October 22, 2021. Castlight Health was later published as an official 7investing recommendation on November 1, 2021.