Executive Summary / Key Takeaways

• Technology-Driven Margin Recovery: HealthEquity is executing a deliberate strategy to digitize service delivery and combat fraud through AI and mobile-first investments, which temporarily pressured margins but are now showing clear progress—service costs declined year-over-year in Q2 FY26 while gross profit expanded to a record 71% of revenue, setting up a potential inflection toward sustained profitability gains.

• Largest HSA Expansion in Two Decades: The One Big Beautiful Bill Act (OBBBA) , signed July 2025, extends HSA eligibility to Bronze and Catastrophic plan holders while allowing direct primary care and telehealth before deductibles, creating a TAM expansion of 3-4 million families that HealthEquity is uniquely positioned to capture through its 21% market share and B2B2C distribution network.

• Custodial Yield Engine Firing: The company has engineered a 22% increase in custodial revenue through strategic HSA cash deployments, lifting average yields from 3.02% to 3.51% while hedging future rate risk with $1.2 billion in treasury forwards, creating a durable, interest-rate-optimized revenue stream that now represents the company's largest profit driver.

• Competitive Moats Under Construction: While facing pressure from Fidelity's no-fee investment platform and Optum (UNH)'s integrated healthcare data, HealthEquity is building defensible differentiation through its proprietary cloud platform, AI-powered claims processing, and comprehensive CDB integration—though execution risks remain as the company balances growth investments with margin expansion.

• Critical Variables for FY26: The investment thesis hinges on whether HealthEquity can normalize fraud costs to its 1 basis point target by year-end while successfully scaling its Assist AI portfolio to drive enrollment among newly eligible Bronze plan members, as these will determine whether the company achieves its raised guidance of $540-560 million in adjusted EBITDA.

Setting the Scene: The HSA Platform at an Inflection Point

HealthEquity, incorporated in Delaware in September 2002, built its foundation on a simple but powerful premise: empower consumers to access tax-advantaged healthcare savings while providing corporate tax advantages for employers. This dual-value proposition positioned the company at the center of the consumer-directed benefits revolution, but the real story lies in how the business model has evolved from basic account administration to a technology-driven healthcare financial platform.

The company makes money through three integrated revenue streams that capture value across the entire HSA lifecycle. Service revenue generates monthly fees from employers and members for account administration, plus recordkeeping fees when members invest HSA assets. Custodial revenue earns interest spreads on HSA cash balances held with depository partners. Interchange revenue captures a slice of every payment made through HealthEquity's card and virtual platforms. This trifecta creates a compounding effect: as members contribute more, invest more, and spend more on-platform, revenue per account expands without proportional cost increases.

HealthEquity's place in the industry structure reflects both strength and vulnerability. As of December 2024, the company held 21% of HSA market share by assets, making it the largest provider by number of accounts but second to Fidelity by assets. This gap reveals the strategic challenge: Fidelity's investment-focused, no-fee model attracts higher-balance savers, while HealthEquity's strength lies in comprehensive benefits integration. The B2B2C distribution strategy—selling through employers, health plans, and brokers—provides scalable customer acquisition but creates dependency on channel partners who could build competing solutions.

The industry sits at the convergence of powerful tailwinds. Average family premiums for employer-sponsored insurance have risen 24% since 2019 and 52% since 2014, forcing consumers into high-deductible health plans that pair naturally with HSAs. Only 4% of HSA members currently contribute the maximum allowed, and just 8% invest their balances, indicating massive untapped engagement potential. Meanwhile, 70% of the workforce will be millennial or Gen Z within two years, bringing digital-first expectations that favor platforms with seamless mobile experiences and AI-driven personalization.

Technology, Products, and Strategic Differentiation

HealthEquity's technology transformation centers on its "member-first secure mobile experience," a strategy that sounds generic but represents a fundamental re-architecture of how members interact with their benefits. The v5 platform's complete cloud migration delivered 92% faster response times, five times greater stability, and an 80% reduction in delays—metrics that translate directly to higher member satisfaction and lower service costs per interaction.

The AI-powered Expedited Claims system exemplifies this shift. Processing millions in reimbursements while driving member satisfaction higher, the system reduces processing costs and accelerates cash flow. More importantly, it creates a data flywheel: each processed claim improves the AI's accuracy, making the platform more valuable to both members and employers. The Assist portfolio—comprising Analyzer for employer benefits decisions, Navigator for employee healthcare choices, and Momentum for AI-driven personalized recommendations—extends this capability into proactive decision support, potentially increasing HSA contributions and investment adoption.

Security investments, while painful, are building a critical moat. The cybersecurity incident in fiscal 2025 and subsequent fraud attacks costing $8 million in Q3 and $17 million in Q4 forced a complete overhaul. The company appointed a Chief Security Officer, implemented passkey authentication, and drove mobile app adoption to 1.7 million downloads by Q2 FY26. The result: fraud reimbursements dropped from $11 million in Q4 FY25 to $3 million in Q1 FY26 and $1.2 million in Q2, with the company on pace to hit its 1 basis point target. This matters because sophisticated fraud prevention becomes a barrier to entry—new competitors cannot match HealthEquity's accumulated fraud data and AI detection capabilities.

The OBBBA response demonstrates strategic agility. Rather than simply marketing to newly eligible Bronze plan members, HealthEquity redesigned its entire enrollment and onboarding process while launching targeted campaigns. This infrastructure investment, while pressuring near-term sales and marketing expenses, creates a capture mechanism for the 3-4 million new families entering the HSA market. The company's 21% market share suggests it could acquire 600,000-800,000 new accounts from this expansion alone.

Financial Performance & Segment Dynamics

Service revenue growth of just 1% year-over-year in the first half of FY26 masks underlying operational improvements. While total accounts grew 5-7%, average service fees per account declined due to product mix shifts toward lower-fee HSAs. However, the company operated with 9% fewer teammates in Q2 FY26, and service costs declined year-over-year both including and excluding fraud costs. This efficiency gain—growing accounts while reducing headcount—signals that technology investments are delivering operational leverage.

Custodial revenue surged 22% to $316.3 million in the first half of FY26, driven by a 49 basis point increase in average yield on HSA cash and an 8% increase in average daily balances. The company's strategy of shifting cash from basic-rate to enhanced-rate depository partners has pushed enhanced-rate placements to 49% of HSA cash, with a target of 60% by FY27. Treasury forward contracts locking in five-year rates above 4% on $1.2 billion of maturities provide visibility into sustained yield expansion, effectively derisking interest rate volatility while maintaining spreads.

Interchange revenue grew 11% to $102.7 million, notably faster than account growth, as members increased contributions and distributions while conducting more payments on-platform rather than requesting cash reimbursements. This behavioral shift increases revenue per account while reducing off-platform leakage, creating a higher-margin revenue stream that compounds as members become more engaged.

Gross profit reached a record 71% of revenue in Q2 FY26, up from 68% in the prior year, driven by revenue growing 12% while cost of revenue grew only 2%. The cost of revenue breakdown reveals the technology leverage: service costs declined despite fraud investments, custodial costs increased modestly with balances, and interchange costs decreased due to processor consolidation. This margin expansion occurred while the company increased technology and security investments, suggesting the cost structure has room for further leverage as these investments mature.

The balance sheet provides strategic flexibility. With $411.9 million outstanding on a $1 billion revolving credit facility at a 5.96% average rate, the company maintains ample liquidity for acquisitions while returning capital through $125.8 million in share repurchases during H1 FY26. The $30 million settlement from the WageWorks lease termination lawsuit, recorded in Q3 FY25, removed a legacy overhang while the BenefitWallet acquisition's $425 million price tag for 616,000 accounts and $2.7 billion in assets demonstrates disciplined M&A at $689 per account.

Outlook, Management Guidance, and Execution Risk

Management's raised FY26 guidance reflects confidence in the technology transformation's trajectory. Revenue guidance of $1.29-1.31 billion (up from $1.285-1.305 billion) and adjusted EBITDA of $540-560 million (up from $530-550 million) implies EBITDA margins of 41.5-42.7%, a significant expansion from historical levels. The guidance assumes the average HSA cash yield will approximate 3.5% for the full year, based on forward curves and the company's hedging position.

The guidance's key assumption is normalization of fraud impact in the second half of FY26. Having reduced fraud costs from $17 million in Q4 FY25 to a $1.2 million quarterly run rate, management believes enhanced controls and mobile adoption will achieve the 1 basis point target by year-end. If successful, this would remove a $15-20 million annual headwind, directly flowing to EBITDA.

OBBBA's impact is not yet fully reflected in guidance. While the 3.4-3.5% yield assumption and account growth targets are baked in, the company is investing in sales and marketing to capture Bronze plan members without assuming specific market share gains. This creates potential upside if enrollment campaigns exceed expectations, though it also introduces execution risk if competitors respond aggressively.

Technology investments will continue, with management explicitly stating that increased technology and development expenses are expected as the company invests in proprietary technology and a modernization project. The tension between investing for growth and expanding margins will be the central execution challenge, particularly as the company rolls out its Assist portfolio and agentic AI capabilities in partnership with Parloa.

Risks and Asymmetries

The cybersecurity incident from fiscal 2025 remains an overhang. A consolidated putative class action lawsuit and mass arbitration alleging failure to implement reasonable data security practices could result in material liability, though management states no loss is estimable. The incident's real risk isn't financial penalty but reputational damage that could slow employer client acquisition, particularly among risk-averse healthcare plans.

Fraud attacks represent an evolving threat that could derail margin expansion. While current controls show dramatic improvement, management acknowledges that "bad actors using sophisticated technology, techniques and methods" continue probing defenses. A successful large-scale attack could not only generate direct costs but also undermine the mobile-first strategy if members lose trust in the platform's security.

Interest rate risk cuts both ways. While the company has hedged $1.2 billion in treasury forwards, a sustained rate decline would pressure custodial spreads, and a rapid increase could force higher interest retention by members. Management believes diversified depository partners and varied contract terms mitigate this, but the 49% concentration in enhanced-rate placements creates exposure if those partners face liquidity issues.

Competitive pressure from Fidelity and Optum threatens market share. Fidelity's no-fee investment platform attracts higher-balance members that generate recordkeeping fees, while Optum's integrated healthcare data provides personalization advantages. HealthEquity's response—building proprietary AI and mobile capabilities—requires sustained R&D investment that could pressure margins if revenue growth slows.

The labor market's underperformance relative to expectations directly impacts HSA market growth. With new HSA sales tied to hiring, softer job growth in calendar 2024 and 2025 could limit account additions despite OBBBA's expansion. Management's comment that "the macro environment for job growth has been tough" suggests this headwind may persist, requiring market share gains just to maintain growth rates.

Valuation Context

At $98.20 per share, HealthEquity trades at an enterprise value of $9.24 billion, representing 21.46 times trailing EBITDA and 7.28 times revenue. The P/E ratio of 59.52 and price-to-free-cash-flow ratio of 27.12 reflect a premium multiple that prices in successful execution of the margin expansion and OBBBA capture strategies.

Relative to key competitor UnitedHealth Group (UNH)—trading at 12.20 times EBITDA and 0.82 times revenue—HealthEquity's multiple appears stretched. However, UNH's conglomerate structure includes lower-margin insurance operations, making direct comparison imperfect. Fidelity's private status prevents direct comparison, but its no-fee model likely trades at a premium to HealthEquity on a per-account basis due to higher investment assets.

The company's balance sheet strength supports the valuation. With a current ratio of 4.23, quick ratio of 3.56, and debt-to-equity of just 0.49, HealthEquity has minimal financial risk. The 11.49% profit margin and 27.89% operating margin demonstrate operational efficiency that compares favorably to Optum's reported margins, though Optum's integration advantages may support higher long-term margins.

Historical multiple ranges are difficult to assess, but the company's current valuation appears to embed assumptions of: (1) achieving the 1 basis point fraud cost target, (2) capturing 20-25% of OBBBA's new market, and (3) sustaining custodial yields above 3.5% through FY27. Any shortfall on these metrics could pressure the multiple, while outperformance may be necessary to justify current levels given the 59x earnings multiple.

Conclusion

HealthEquity stands at the intersection of technology-driven operational leverage and the largest HSA market expansion in two decades. The company's deliberate strategy to invest in AI, mobile, and security capabilities—while painful in the short term—is showing tangible results through declining fraud costs, expanding gross margins, and improved operational efficiency. The OBBBA legislation provides a multi-year tailwind that could add 600,000-800,000 accounts to HealthEquity's 17 million account base, while the shift to enhanced-rate custodial placements and treasury hedging creates a durable, interest-rate-optimized revenue engine.

The investment thesis's success depends on two critical variables: achieving the fraud cost normalization target by year-end, and successfully scaling the Assist AI portfolio to capture newly eligible Bronze plan members. If management executes on both, the company could exceed its raised EBITDA guidance and justify its premium valuation through sustained margin expansion. However, competitive pressure from Fidelity's no-fee model and Optum's integrated data advantages, combined with lingering cybersecurity litigation risk, create meaningful downside scenarios.

For investors, the key question is whether HealthEquity's technology investments have created sufficient differentiation to maintain pricing power and market share in an increasingly competitive landscape. The next two quarters will provide crucial evidence as fraud costs normalize and OBBBA enrollment campaigns launch, determining whether this is a margin inflection story or a value trap at 59x earnings.