(Story updated at 1:30 p.m. ET Monday, March 17.)
Castlight Health went public with a bang Friday, with its shares opening at $16 each and soaring to a closing price of $39.80 per share, up 148.75% for the day. The quick run-up demonstrated investors' expectations for vast profit potential in healthcare technology, and specifically in the type of price transparency software that Castlight is offering, market analysts said.
Castlight's market valuation of roughly $3 billion after its first day of trading “reflects a lot of optimistic assumptions about the company,” said Jay Ritter, a finance professor at the University of Florida who analyzes initial public offering valuations. “They've got a business model that a lot of people believe has the potential for significant growth in revenue, and high profit margins.”
Castlight was trading around $37.60 per share mid-day on Monday, March 17.
San Francisco-based Castlight, in a Securities and Exchange Commission filing
for its IPO, described itself as “a pioneer in a new category of cloud-based software that enables enterprises to gain control over their rapidly escalating health care costs. Our Enterprise Healthcare Cloud allows our customers to conquer the complexity of the existing health care system by providing personalized, actionable information to their employees, implementing technology-enabled benefit designs and integrating disparate systems and applications.”
Castlight's price-to-sales ratio is the highest Ritter has seen since the heady dotcom days at the start of the century. “There are no other companies since 2000 that had a ratio anywhere that high,” he said.
But Todd Cozzens, a venture partner and senior adviser at Menlo Park, Calif.-based Sequoia Capital, said the high multiple is not necessarily a harbinger of a health information technology
stock bubble like the dotcom bubble that burst with a major market selloff beginning in March, 2000.
“This valuation is grounded in the fact there aren't a lot of these transparency tools out there,” Cozzens said. “And large self-insured employers and payers are going to need these tools. With the cost of care going up and the amount of co-pays and out-of-pocket burdens being put on the employees, there is going to be a need for these transparency tools.”
Other market factors also fed into the sharp price run-up for Castlight shares, Cozzens said. One is “a dearth of assets that have been out there” in the healthcare area over the last five to seven years. As a result, “you have a big, pent-up appetite,” he said.
Asked about the high value the stock market is putting on the company, Giovanni Colella, Castlight co-founder and CEO told CNBC's Squawk on the Street Friday, “We are focused on solving the biggest problem for the American enterprise, which is healthcare cost. If we do that well, we create a ton of value for everybody.”Castlight noted
that it has signed 95 customers in the past two years of operations, including 24 Fortune-500 companies. Reported clients include Wal-Mart, Microsoft and electric car maker Tesla. Revenue reached $13 million in 2013, $4.2 million in 2012 and $1.9 million in 2011. The company's net losses stood at $19.9 million for the year ended Dec. 31, 2011, $35 million for 2012 and $62.2 million for 2013 and it has an accumulated deficit of $131.2 million, according to its SEC filing.
The filing was optimistic about the company's business prospects: “We believe that Castlight is well-positioned to leverage its use of large amounts of healthcare related data, sophisticated data analytics
, a strong customer portfolio and early-mover advantage to play a role in dramatically improving the efficiency of the U.S. healthcare system,” the filing stated.Follow John N. Frank on Twitter: @MHJFrankFollow Joseph Conn on Twitter: @MHJConn