HealthEquity, Inc. (NASDAQ:HQY): Is the Stock's Strong Performance Supported by Its Financials and Growth Potential?

HealthEquity, Inc. (NASDAQ:HQY), a leader in health savings account (HSA) administration, has seen its stock rise 10.6% over the past four weeks amid robust financial performance and favorable regulatory shifts. However, the stock carries a Zacks Rank #3 (Hold), raising questions about whether its recent gains are justified. This analysis delves into ROE trends, Zacks' contradictory signals, and legislative tailwinds to argue that HQY's undervaluation and strategic advantages position it as a compelling buy—despite the short-term Hold.

ROE: A Moderate but Improving Metric

HealthEquity's Return on Equity (ROE) for Q2 2025 stands at 5.53%, up from 4.66% in 2024. While this may seem modest, the improvement reflects operational efficiency gains. A deeper look shows that net income surged 238% year-over-year to $35.8 million in Q2 2024, driven by 23% revenue growth to $299.9 million. Meanwhile, total HSA assets rose 27% to $29.5 billion, with 9.4 million HSAs now under management.

The ROE uptick aligns with margin expansion, as Adjusted EBITDA grew 46% to $128.3 million, or 43% of revenue. This suggests management is effectively leveraging equity to fuel growth. Additionally, the company's $300 million stock repurchase program could further boost ROE by reducing equity over time.

While ROE remains below some peers, the trendline points upward—a positive sign for long-term investors.

Zacks' Contradictory Signals: Hold vs. Strong Style Scores

Despite the Hold rating, HealthEquity shines in Zacks' Style Scores:
- Momentum Score: A (top tier), reflecting a 10.6% price gain over four weeks and upward earnings revisions.
- Growth Score: B, backed by 40% projected earnings growth for 2025 and 17.6% for 2026.
- VGM Score: B, balancing valuation, growth, and momentum.

The Hold rating (#3) likely stems from Zacks' focus on near-term risks, such as post-earnings volatility (historically -17% returns over 20 days) and cautious analyst estimates for Q2 2025 ($0.81 EPS vs. prior 30% growth). Backtest the performance of HealthEquity (HQY) when buying on the day of quarterly earnings announcements and holding for .

However, these concerns appear overblown:
- The company has exceeded earnings estimates 75% of the time, with an average surprise of +12.4%.
- Analysts have raised 2026 EPS estimates four times in 60 days, suggesting upward momentum.

Investors should prioritize the Style Scores over the Hold rating. Zacks' framework often downgrades stocks with high growth but “neutral” earnings revisions—yet HQY's fundamentals argue for a Buy.

Legislative Tailwinds: A Growing HSA Market

The HSA sector is primed for expansion thanks to 2025 regulatory changes:
1. Expanded Eligibility: Bronze and catastrophic health plans now qualify for HSAs, broadening the customer base.
2. Higher Contribution Limits: The IRS raised 2025 caps to $4,300 (self) and $8,550 (family), with catch-up contributions for those over 55.
3. Wider Qualified Expenses: Physical fitness costs and direct primary care services are now eligible, boosting HSA utility.

These changes could double HSA assets by 2030, per industry estimates. HealthEquity, with a 27% market share, stands to capture disproportionate growth. Its digital platform and focus on investment-linked HSAs (40% of assets now invested) further differentiate it in a sector ripe for innovation.

Recent Financials: A Story of Consistent Outperformance

• Revenue and Net Income: Q2 2024 revenue rose 23% YoY to $299.9 million, with net income jumping 238% to $35.8 million.
• Account Growth: HSAs grew 15% YoY to 9.4 million, with 711,000 holding investments—a 24% increase.
• Balance Sheet Strength: Equity rose to $2.16 billion in Q2, while debt refinancing lowered interest costs.

These results validate the company's scale and operational leverage. Management's revenue guidance of $1.165 billion–$1.185 billion for 2025 implies continued momentum, with non-GAAP net income expected to grow 30% YoY.

Conclusion: A Buy for the Long Term

While the Zacks Hold reflects short-term volatility risks, HealthEquity's ROE trajectory, Zacks Style Scores, and legislative tailwinds paint a compelling picture of a high-growth, undervalued stock. At a forward P/E of 15.8x (below its five-year average), the stock offers upside as HSA adoption accelerates and margins expand.

Investment Recommendation:
- Buy: For investors with a 1–3 year horizon, HQY's strategic advantages and growth catalysts justify its valuation.
- Hold: For those averse to post-earnings volatility, though even short-term traders could benefit from upward revisions ahead of the June 3 earnings report.

In a sector poised for explosive growth, HealthEquity's leadership position and financial resilience make it a buy—despite the ratings agency's hesitation.

HealthEquity's stock price performance vs. the S&P 500 over the past year