At the onset of the pandemic and in the periods that followed, many investment theses emerged, driven by shifts in consumer behavior. One notable thesis predicted accelerated adoption of health information services—healthcare tech-enabled solutions—following the initial surge caused by mandatory and recommended preventive health measures.

This initial spike in sales, fueled by the pandemic, led to valuations soaring to stratospheric levels, outpacing both the broader software application industry and the technology sector. In Q2 2021, the price-to-earnings (PE) ratio for these healthcare solutions reached over 100, compared to 50x in the software industry and 33x in the technology sector.

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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These high valuations, driven by elevated expectations and "priced to perfection" scenarios, left little margin for error. While the median sales growth surged during the pandemic and continued through subsequent quarters, by 2023, it had reverted to pre-pandemic levels.

Beyond the gradual return of consumers to traditional habits, additional headwinds—such as a lack of consumer education, fierce competition, slow adoption rates, and poor financial performance—exacerbated the long-duration nature of earnings in the quantitative tightening environment that followed the fiscal and monetary-driven speculative frenzy.

As a result, the valuation contraction in the health information services sector was significantly more severe compared to other areas. The sector's PE ratio plummeted from triple digits to the low 40s, while the price-to-sales ratio shrunk to just one-third of its Q2 2021 value.

Unlike industries such as software infrastructure, which benefited from secular demand tailwinds—most notably in AI, particularly for large caps—the health information services industry did not experience such a boost. The long-duration nature of its earnings became further evident as the parabolic rise in sales growth was followed by a steep decline, with the industry failing to generate positive net income throughout the period.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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At the height of the speculative cycle in Q2 2021, while short-duration assets saw their profit margins explode, the median operating margin for the health information services industry stood at -21%, the worst in over a decade, despite a median gross profit margin of over 50%.

As monetary policy now begins to shift toward a more accommodative stance, these depressed valuations may present opportunities for arbitrage within the industry or across similar thematic investment baskets.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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