Executive Summary / Key Takeaways

• Differentiated Care Management: Alignment Healthcare's proprietary AVA technology and high-touch clinical model enable superior care coordination and cost control, driving consistent outperformance in Medicare Advantage.
• Robust Growth & Profitability: The company has demonstrated significant membership growth (25.9% YoY in Q3 2025) and strong margin expansion, achieving positive adjusted EBITDA in 2024 and significantly raising 2025 guidance to $90-$98 million at the midpoint.
• Stars Advantage & Competitive Moat: With 100% of members in 4-star or higher plans for 2026, Alignment Healthcare possesses a substantial competitive edge, further bolstered by upcoming CMS Star rating methodology changes favoring clinical outcomes and health equity.
• Strategic Investments & Future Outlook: Ongoing investments in administrative automation, AI, and provider partnerships are expected to widen its competitive advantages, supporting sustained membership growth of at least 20% year-over-year and continued adjusted EBITDA expansion beyond 2025.
• Financial Strength: The company is poised to be free cash flow positive in 2025, supported by strong liquidity and a significantly reduced cost of capital following its convertible notes refinancing.

Setting the Scene: A New Era for Medicare Advantage

Alignment Healthcare, Inc. (NASDAQ:ALHC) is carving a distinct path in the evolving Medicare Advantage (MA) landscape, a sector increasingly defined by the imperative for high-quality, affordable care. Founded in 2013, the Orange, California-based company set out to redefine senior healthcare through a consumer-centric platform. Its core strategy revolves around a "virtuous cycle" of member engagement, data-driven care, and cost management, designed to deliver superior outcomes and reinvest savings into richer benefits. This approach positions Alignment Healthcare as a formidable player in an industry undergoing significant disruption, where traditional models are struggling with lower reimbursement and heightened quality standards.

The broader MA industry faces a paradigm shift, with CMS emphasizing program integrity and value-based care. Large incumbent Managed Care Organizations (MCOs) have experienced market share losses and are grappling with rising medical cost ratios, often exceeding 90%. In contrast, Alignment Healthcare's model, which prioritizes care management over purely actuarial underwriting, has enabled it to thrive. The company's focus on proactive health management and integrated care delivery has become a critical differentiator, allowing it to consistently take market share from established players in highly competitive markets.

Technological Edge: AVA as the Core Differentiator

At the heart of Alignment Healthcare's success is its proprietary technology platform, Alignments Virtual Application (AVA). This sophisticated system is not merely a data repository but a dynamic engine that enables personalized care, manages member relationships, and coordinates risk with provider partners. AVA's unified data architecture provides real-time operating and financial visibility across the healthcare ecosystem, a significant competitive advantage over incumbent legacy players often burdened by fragmented systems. This seamless integration streamlines workflows and reduces the need for extensive manual reconciliation, contributing to operational efficiency.

AVA employs predictive algorithms to stratify seniors into categories—healthy, healthy utilizer, pre-chronic, and chronic—ensuring optimized care for every stage of a senior's life. This data-driven approach directly translates into tangible benefits, such as reducing unnecessary hospital admissions and lowering overall costs. For instance, the company consistently reports inpatient admissions per 1,000 in the low 140s, significantly outperforming industry expectations. These efficiencies allow Alignment Healthcare to reinvest savings into enhanced coverage and benefits, fueling its membership growth and strengthening its market position.

The company is continuously investing in AVA's evolution, focusing on administrative automation, enhancing AI logic within its Care Anywhere program, and improving productivity in clinical initiatives. These R&D efforts aim to generate even better and faster insights, enabling quicker action and further streamlining operations. Management is also exploring the application of Agentic and Generative AI, carefully evaluating their potential to further improve clinical quality and member experience outcomes at lower costs. For investors, AVA represents a robust competitive moat, directly contributing to Alignment Healthcare's ability to achieve higher margins, maintain a strong market position, and drive long-term growth through technological leadership.

A History of Growth and Strategic Expansion

Since its founding in 2013, Alignment Healthcare has demonstrated an impressive growth trajectory. Its Health Plan Membership expanded from approximately 13,000 members at inception to 229,600 members as of September 30, 2025, reflecting a 30% compound annual growth rate across 45 markets and five states. A pivotal period of expansion began in 2020, with the company entering 29 new markets and four additional states. By the 2025 plan year, Alignment offered plans in 45 markets across California (22 markets), North Carolina (16 markets), Nevada (2 markets), Arizona (3 markets), and Texas (2 markets).

The year 2024 marked a significant milestone, with health plan membership surging by approximately 59% to 189,100 members. This rapid growth was achieved while the company navigated a challenging Medicare Advantage environment, including rising Star ratings standards and the initial phase-in of the V28 risk model changes. Crucially, 2024 was also the year Alignment Healthcare achieved its first positive adjusted EBITDA profitability, a testament to its differentiated model and operational effectiveness. To support this scaling, the company strategically implemented new core systems in 2024, including an EHR (Athena), an HR system (Workday), and a claims adjudication platform (Facets), all seamlessly integrated with its foundational AVA platform.

Financial Performance: Delivering on the Promise of Profitability

Alignment Healthcare's financial results underscore the efficacy of its care management model. For the nine months ended September 30, 2025, total revenues reached $2.94 billion, a substantial 46.6% increase from $2.00 billion in the same period of 2024. This growth was primarily driven by a 25.9% year-over-year increase in Health Plan membership to 229,600 members, coupled with higher revenue per member per month, partly attributable to changes from the Inflation Reduction Act (IRA).

Profitability has seen significant expansion. Adjusted gross profit for the nine months ended September 30, 2025, surged by 72.3% to $369.8 million, up from $214.7 million in the prior year. This translated into a Medical Benefits Ratio (MBR) of 87.4% for the nine-month period, an improvement of 1.90 percentage points compared to 89.3% in 2024. The third quarter of 2025 alone saw an MBR of 87.2%, a 120 basis point improvement year-over-year, driven by disciplined execution of clinical activities and inpatient admissions per 1,000 in the low 140s. The company's adjusted EBITDA for the nine months ended September 30, 2025, reached $98.5 million, a dramatic increase from $0.024 million in the same period of 2024.

Operational efficiency is also evident in the Selling, General, and Administrative (SG&A) expenses. As a percentage of revenue, SG&A decreased for the three and nine months ended September 30, 2025, reflecting economies of scale from membership growth. The company's adjusted SG&A, excluding ACO REACH, declined from 14.4% in 2023 to 11.1% in 2024, an improvement of approximately 330 basis points. Interest expense also saw a notable decrease following the November 2024 refinancing with 4.25% convertible notes, replacing prior term loans that carried an average interest rate of 11.77%. This move is expected to reduce annual interest expense by approximately $10 million.

Liquidity and Capital Strength

Alignment Healthcare maintains a strong financial position, with $644.10 million in cash, cash equivalents, and short-term investments as of September 30, 2025. The company's operating parent company held $145.50 million in liquid assets, and management believes current liquid assets are sufficient to fund operating and organic capital needs for at least the next 12 months. A significant milestone is the expectation of achieving free cash flow positive status on a company-wide basis in 2025. This robust liquidity provides the flexibility to pursue strategic initiatives and potential tuck-in acquisitions without immediate reliance on external financing. The company also consistently meets minimum capital requirements, including Risk-Based Capital (RBC) and Tangible Net Equity (TNE).

Competitive Positioning: Outperforming in a Challenging Market

Alignment Healthcare operates in a highly competitive Medicare Advantage market, vying with industry giants such as UnitedHealth Group (UNH), Humana (HUM), and Centene Corporation (CNC). While these larger players benefit from immense scale and established networks, Alignment Healthcare differentiates itself through its specialized, tech-enabled, consumer-centric approach. Its AVA platform provides a distinct advantage in personalized care and risk management, allowing for more agile adaptation to member needs and potentially stronger customer loyalty in shared markets.

The company's consistent achievement of high Star ratings is a critical competitive moat. For the 2026 payment year, 100% of Alignment's Medicare Advantage members are enrolled in plans rated 4 stars or higher, significantly outperforming the national average of approximately 63%. In California, this advantage is even more pronounced, with Alignment's 100% 4-star or above rating contrasting sharply with competitors, where only about 70% of members are in plans rated 4 stars or higher for payment year 2027. This superior quality translates directly into additional funding advantages from CMS.

Furthermore, Alignment Healthcare's model is proving more resilient to industry-wide pressures. While some larger players like Humana, UnitedHealth Group, and CVS Health (CVS)'s Aetna are reportedly exiting certain states and counties in 2026 due to market disruption, Alignment is expanding its plan benefit packages and maintaining its geographic footprint across five states and 45 counties. This ability to grow profitably amidst disruption is a testament to its disciplined product design and effective care management capabilities. The company's approach to risk adjustment, which has historically been less aggressive than some peers, also provides a relative advantage in an environment of increased regulatory scrutiny on program integrity.

Outlook and Strategic Initiatives: A Multi-Year Growth Pathway

Alignment Healthcare's outlook is characterized by confidence in continued robust growth and margin expansion. For the full year 2025, the company has significantly raised its guidance, now expecting revenue between $3.93 billion and $3.95 billion, adjusted gross profit between $474 million and $483 million, and adjusted EBITDA between $90 million and $98 million. The midpoint of the adjusted EBITDA guidance, $94 million, represents a substantial increase from its initial full-year guidance of $47.5 million. This implies an MBR of 87.9%, reflecting nearly 100 basis points of improvement year-over-year.

The company anticipates at least 20% year-over-year membership growth for the 2026 plan year, driven by strong early AEP results and incremental opportunities to take market share amidst industry disruption. This growth will be balanced with profitability objectives, maintaining generally stable to modestly reduced benefits across its products.

Several tailwinds support this positive outlook:

• V28 Risk Model: Management believes Alignment Healthcare will be less impacted by the third and final phase-in of the V28 risk model changes in 2026 compared to competitors.
• Stars Rating Evolution: Future changes to the CMS Star Quality Rating System are expected to be favorable. For rating year 2026 (payment year 2027), CAPS and administrative weightings will be reduced, which would have increased Alignment's California HMO contract's raw score by approximately 0.23 during the past rating cycle.
• Health Equity Index: For rating year 2027 (payment year 2028), CMS is replacing the current reward factor with the "Excellent Health Outcomes for All reward" (formerly Health Equity Index). This new methodology, which rewards plans performing well on clinical quality for complex populations, could provide Alignment's California HMO contract with a star score bonus of 0.25 or greater.
• Cohort Maturation: A significant embedded gross margin opportunity exists as over 50% of its members are in year 1 or year 2 cohorts. Gross profit per member per month (PMPM) is expected to grow from $90 for year 1 members to $230 for members in year 5 and beyond, creating an estimated $600 million in embedded gross profit from the existing membership base alone.

Strategic investments are ongoing to further widen competitive advantages. These include enhancing back-office automation, improving clinical engagement, advancing AVA AI capabilities, and strengthening provider relationships. The company is actively deepening these partnerships, particularly through shared risk arrangements where Alignment manages inpatient risk and utilization management, leading to improved clinical and financial outcomes for providers. Additionally, Alignment is exploring "tuck-in opportunities" for acquisitions, especially in ancillary services like dental PPO or behavioral HMOs, to capture margin improvement with minimal execution risk.

Risks and Considerations

Despite its strong positioning, Alignment Healthcare faces inherent risks. The Medicare Advantage industry remains subject to significant regulatory changes, including potential future risk adjustment model modifications beyond V28. While the recent federal court decision vacated CMS's final rule on RADV audit extrapolation, the underlying intent for program integrity remains, and the company continues to monitor developments. Changes related to the Inflation Reduction Act, particularly concerning the Part D program, introduce new variables that require prudent management, although Alignment has demonstrated confidence in its 2025 Part D assumptions.

The company's rapid growth, while a strength, also necessitates effective scaling of operations and clinical models to maintain quality and cost control. While current liquidity is strong, future capital requirements could increase with aggressive market expansion or larger strategic acquisitions. Furthermore, the California Senate Bill 167, which suspends NOL utilization for certain taxpayers, could impact future tax liabilities.

Conclusion

Alignment Healthcare stands as a compelling investment thesis in the dynamic Medicare Advantage sector, distinguished by its tech-powered care management model and unwavering commitment to senior-centric care. The company's proprietary AVA platform provides a critical technological edge, enabling superior clinical outcomes, efficient cost control, and a robust competitive moat against larger, more traditional players. This differentiation has translated into impressive financial performance, marked by consistent membership growth, significant margin expansion, and a clear path to sustained profitability, culminating in a free cash flow positive outlook for 2025.

With a strong foundation built on high Star ratings, strategic investments in technology and provider partnerships, and a disciplined approach to growth, Alignment Healthcare is well-positioned to capitalize on ongoing industry disruption. The company's ability to thrive amidst evolving reimbursement models and regulatory changes, coupled with favorable shifts in Star rating methodologies, underscores its durable competitive advantages. As Alignment Healthcare continues to expand its footprint and deepen its technological integration, it presents a compelling long-term opportunity for investors seeking exposure to a leader in the future of Medicare Advantage.