- Muddy Waters' Carson Block is short eHealth.
- He said on a CNBC interview the company is an intellectual fraud.
- Shares of eHealth are worth $20, he said.
Carson Block is the founder and CIO of Muddy Waters Capital and is considered to be one of the most knowledgeable and notable short sellers in the investment community. On Wednesday morning he detailed during a CNBC interview his newest short position in eHealth, Inc. (NASDAQ: EHTH)
U.S.-based eHealth is a digital health insurance exchange that doesn’t fit the criteria of being a fraud from a legal perspective, Block told “Squawk Box” co-host Andrew Ross Sorkin. But the company is guilty of operating as a “massive stock promotion” entity which makes it a fraud from an intellectual perspective.
The company is led by a management team that is eager to “pump the stock” and has done so through aggressive accounting techniques that otherwise mask a “very unprofitable” business.
Specifically, a new accounting standard was introduced to Wall Street in 2018 but mostly applied to software companies with recurring license revenue, he said. But eHealth made use of the standard despite being in the medical and insurance space.
High churn rates
Once implemented, the company can book three years worth of revenue upfront at the start of the contract, he said. Last year, eHealth booked around $500 million in revenue based on their “highly aggressive assumptions” that it will collect the full amount of revenue over the years.
What’s most concerning, is these new clients are found through a direct response TV advertising program which typically comes with very high churn rates. In fact, churn rates jumped from 37% in 2017 to 47% in 2019.
“They’re basically booking all that theoretical revenue today and that is the crux of the problem, he said.”
This helped the company claim $100 million in operating profit but Block’s estimates suggest eHealth actually lost $181 million on an operating basis.
What the stock is worth
During Block’s live CNBC interview, eHealth’s stock fell more than 15% and slightly recovered throughout the entire trading session to end the day at $103.20, down 11.7%. According to Block’s analysis, the stock has plenty of room to fall to what he believes is a fair valuation of around $20 a share.
Beyond any potential accounting misdoings, the company actually loses around $400 for every Medicare Advantage enrollee although the company claims it is in fact making a few hundreds of dollars.
“You keep doing that and you lose capital market access,” he said. “That’s it.”