Elevator Pitch

I have a Hold investment rating for Accolade, Inc. (NASDAQ:ACCD) stock. My prior April 5, 2024 write-up drew attention to Accolade's latest corporate developments like the addition of new partners.

The current update reviews ACCD's Q1 FY 2025 (YE February 28, 2025) financial performance and evaluates the company's financial prospects. Accolade's Q1 results benefited from a favorable timing difference, but its updated full-year guidance was mixed. ACCD lowered its FY 2025 top line guidance by -5%, but the implied FY 2025 EBITDA margin guidance of +3.7% was a positive surprise. As such, I have revised my rating for Accolade from a Buy to a Hold to reflect my Neutral view of the stock.

First Quarter Results Beat Expectations Due To A Timing Factor

Accolade issued its financial results announcement for the first quarter of fiscal 2025 (March 1, 2024 to May 31, 2024) on June 27, 2024 after the market closed. The company's latest quarterly financial performance surpassed expectations.

Top line for ACCD rose by +18% YoY to $110.5 million in Q1 FY 2025. Accolade's first quarter revenue was +6% higher than its management guidance of $104.5 million (mid-point) and +5% better than the sell-side's consensus estimate of $105.2 million as per S&P Capital IQ data.

The company's normalized EBITDA loss narrowed substantially from -$12.6 million in the first quarter of FY 2024 to -$3.3 million for the most recent quarter. ACCD's actual Q1 FY 2025 non-GAAP adjusted EBITDA turned out to be much narrower than the analysts' consensus projection of -$10.1 million (source: S&P Capital IQ) and the company's guidance of -$10.5 million.

At the company's recent first quarter analyst briefing, ACCD explained that its "outperformance in Q1 was largely driven by the timing of revenue recognition" pertaining to "a performance guarantee type of item" amounting to around "$6 million." Previously, Accolade had anticipated that this $6 million of revenue will be largely recognized in the Q2 FY 2025-Q4 FY 2025 time frame as opposed to the first quarter.

In other words, Accolade's Q1 FY 2025 results beat was attributable to a timing factor rather than an improvement in business fundamentals.

Updated Revenue Outlook Was A Negative Surprise

ACCD offered the company's financial guidance for Q2 FY 2025 and full-year FY 2025 as part of its first quarter results disclosure.

The company expects to report a top line of $105 million in the second quarter of the current fiscal year, as per the mid-point of its guidance. This is -7% below the market's prior consensus Q2 FY 2025 revenue forecast of $113.2 million (source: S&P Capital IQ). Accolade's second quarter guidance also translates into a -5% top line contraction on a sequential or QoQ basis.

Furthermore, Accolade cut the mid-point of its full-year FY 2025 revenue guidance by -5% from $490 million earlier to $467.5 million now. This also means that ACCD's revenue expansion is expected to moderate from +14% in FY 2024 to +13% in FY 2025.

Accolade highlighted at its Q1 FY 2025 analyst call that it is "de-risking the usage-based component of the revenue stream" such as "visit fees or case rate fees" by lowering "the marginal incremental marketing spend to drive incremental usage." Separately, the company also indicated at the company's first quarter result briefing that it doesn't "build in an assumption about massive growth (for employee accounts) in the current macro environment."

The company has acknowledged that macroeconomic conditions are challenging, and it has set a new revenue growth target that is more easily achievable. The more modest top line expansion outlook warrants a downgrade in my rating for ACCD from a Buy to a Hold.

But Profitability Improvement Prospects Are Still Favorable

The potential re-rating catalyst for Accolade relating to profitability improvement remains intact, even though the company's near-term revenue growth prospects have weakened, as highlighted in the preceding section.

The mid-point of ACCD's updated full-year revenue ($467.5 million) and EBITDA ($17.5 million) guidance implies that the company could potentially achieve an EBITDA margin of 3.7% for FY 2025. This is better than the sell-side analysts' previous consensus forecast of 3.4% (source: S&P Capital IQ) and the company's prior EBITDA margin guidance of 3.5% (mid-point). As a comparison, Accolade suffered from a -$7.5 million EBITDA loss in the previous fiscal year or FY 2024. ACCD's full-year EBITDA guidance suggests that the stock might still witness meaningful profitability improvement going forward.

In my early-April article, I made reference to Accolade's comments at the 42nd Annual J.P. Morgan (JPM) Healthcare Conference indicating that the company is "turning the corner on profitability." In its Q1 FY 2025 results announcement, ACCD emphasized that it is "focusing our investments on margin expansion and revenue opportunities that support our profitability objectives."

Specifically, lower marketing expenses are likely to be the most important driver of a better-than-expected FY 2025 EBITDA margin guidance for Accolade. ACCD shared at its Q1 FY 2025 earnings call that the company will be "looking at all marketing spend to focus on the most profitable opportunities" and cut the "least efficient marketing spend."

Accolade's renewed focus on profitability gives me greater confidence that the company can realize its goal of registering a much higher EBITDA margin in the 15%-20% range for the long run. Considering that the profitability improvement catalyst for ACCD is intact, a Sell rating for the stock will be too harsh and unwarranted.

Closing Thoughts

Accolade is now awarded a Hold rating as opposed to a Buy previously. The company's near-term financial prospects are mixed as per its full-year guidance, and the stock is reasonably valued.

ACCD's forward FY 2025 Enterprise Value-to-Sales or EV/S multiple is currently 0.8 times based on its full-year top line guidance of $467.5 million and the stock's last done share price of $4.65 as per post-market trading on June 27. A EV/S metric of below 1 times for Accolade is fair. Its expected FY 2025 revenue growth is at the low-teens percentage, or much lower than +20% (or better) top line expansion rate associated with a fast-growing technology company deserving of a higher multiple.