Why HealthStream Shares Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of HealthStream (NASDAQ: HSTM  ) , an Internet-based talent management company that provides learning solutions to the health care industry, jumped as much as 16% after the company reported its second-quarter earnings results.

So what: For the quarter, HealthStream reported revenue growth of 24% to $31.9 million as EPS matched the year-ago quarter's total of $0.09 despite an 8% increase in EBITDA. HealthStream's results matched the Street on EPS at $0.09, but slightly topped the $31.4 million in revenue analysts had expected. Overall, its learning and talent management segment saw revenue climb by 30% as subscription revenue jumped 28%. More importantly, HealthStream boosted its full-year revenue growth forecast to a range of 23% to 25% from previous estimates of 20% to 22% growth. This would imply full-year revenue of $127.6 million to $129.6 million compared to current Street expectations that call for $126.5 million in revenue.

Now what: This was another good earnings report for HealthStream, but I'd really struggle to call it great and worthy of up to a 16% pop in its share price. As I noted in April, the company's business model makes a lot of sense on paper, and its subscription-based service should result in a recurring revenue model that drives free cash flow generation. On the other hand, at 75 times forward earnings, we're looking at a company that has zero room for error. Eventually, its growth rate is going to slow, and when that happens this lofty valuation may not hold up.

Rising health care costs continue to be a hotly debated topic, and a primary reason why learning solutions companies like HealthStream have seen their software in high demand. Even legendary investor Warren Buffett has called this trend "the tapeworm that's eating at American competitiveness." To learn more about what's happening to the health care system -- and how to potentially profit from this trend -- click here for free, immediate access.