Phreesia Stock Has Been Crushed. We're Standing By Our Pick. — Barrons.com

By Dan Victor

Some stocks are hot. Others are cold. Then there's Phreesia.

Shares of the healthcare software company have lost nearly half their value in the last four months. Better than expected third quarter earnings on Dec. 8 did nothing to help as the stock plunged 23% on the day.

We missed the mark timing Phressia as a Barron's stock pick in August. At the time we cited several tailwinds including solid sales momentum. Efforts to integrate artificial intelligence was part of the bullish thesis.

The drop is ugly, but we're not quite ready to let this one go. In our view, the company's growth outlook is still positive. We see Phreesia today and its $1 billion market capitalization positioned to rebound after the surprising valuation reset. Let's unwrap why Phreesia is still a buy for 2026.

Software stocks have taken a beating in recent months amid some skepticism in the market over whether AI investments will pay off — or perhaps that AI itself will eventually make application software obsolete. Some of those fears may be exaggerated, with Phreesia just being one of many names caught up in the volatility.

Phreesia's platform helps its healthcare clients modernize their patient facing processes and back end workflows. The company benefits from an industrywide effort to generate operational efficiencies, while its AI features create new use cases.

Recent financial trends confirm healthy vitals, a stark contrast to what the stock price collapse might otherwise imply.

Third quarter revenue of $120 million climbed by 13% year over year, as the average number of healthcare clients during the period reached 4520, an increase of 7% from the prior year quarter. Management projected optimism for sales, including on the customer response to new AI initiatives.

"We're still seeing a lot of demand for intake (solutions), and a lot of our newer AI offerings are driving a lot of uptake and inbound, very specifically our VoiceAI workflows and applications," CEO Chaim Indig said on the conference call.

Phreesia processed $1.2 billion in transactions volume, an increase of 9% year over year, through its billing functionality that facilitates payments for upfront costs such as medical deductibles with growing utilization.

The dynamic is reflected in rising margins with a pivot toward more consistent profitability — a key factor for why we originally recommended buying the stock. The $4.3 million in quarterly net income reversed a loss of $14.4 million the period last year. Free cash flow has also accelerated, totaling $8.8 million in the third quarter.

If there was a culprit for the disappointing market reaction to the earnings report, it was likely guidance for the year ahead. Phreesia issued preliminary fiscal 2027 revenue guidance of $545 million to $559 million, a 14% to 16% increase compared with the 2026 estimate, but below the market consensus by a few percentage points.

Other elements of the outlook were stronger, including a higher target for earnings before tax, interest, depreciation, and amortization (Ebitda) between $99 million to $101 million from a previous range of around $90 million. For fiscal 2027, Phreesia projects its Ebitda between $125 million to $135 million, representing an annual increase of up to 35%.

DA Davidson analyst Clark Wright described the third quarter result as solid, while noting early 2027 guidance for revenue growth appeared "conservative." That constructive take on Phreesia's developments is a recurring theme on Wall Street. All 18 analysts tracked by FactSet reiterated a buy rating for the stock after its latest earnings. It now has an average price target of $29.82, implying 80% upside from the current level. Wright's price target on Phreesia at $35.00 is the high on the street.

The trading action in Phreesia has stumped many observers, serving as a reminder to the highly volatile world of small-cap technology. So the question remains, what's wrong?

Beyond the broader software industry weakness, a few developments have added a new layer of complexity to the company's potential. In November, Phreesia closed its $160 million acquisition of AccessOne, marking an expansion into the emerging field of medical provider financing that helps clients monetize receivables.

The market might be questioning the $110 million used to finance the transaction. The amount itself is manageable, though makes a material change to the company's balance sheet that previously didn't carry any significant debt. Phreesia management tempered any lofty expectations to the deal's immediate growth impact by noting that the AccessOne product is "not really suitable for the vast majority" of its existing client base and will require additional investment to make it ready for broad cross-selling.

Separately, there are some questions regarding the regulatory landscape surrounding its "networks solutions" segment. This business allows life sciences companies opportunities to market products and services directly to consenting patients. Phreesia CFO Balaji Gandhi described "a lot of fluidity" in its clients' decision-making process for new advertising spending. That uncertainty is likely another factor dragging the stock.

Nevertheless, when getting past those headwinds, Phreesia's valuation looks palatable. The stock now trades at 7 times adjusted Ebitda guidance for fiscal 2027. Investors have a chance to pick up an industry leader at just 2 times sales, just as it's expected to grow revenue and earnings in the double digit range.

These indicators make Phreesia look like a bargain next to a peer group of healthcare tech peers. For example, Veeva Systems and Doximity each trade at more than 10 times sales and above 20 times forward Ebitda.

Ultimately, the overriding pessimism toward Phreesia stock seems unjustified. A continued string of strong quarterly results could be the spark needed to bring back some renewed bullish sentiment, potentially leading to a run back in the shares toward the $25 price level.

There's no do-overs in the stock market, but with a fresh start, Phreesia could still prove to be a winner in 2026.

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