Healthcare company Accolade Inc. (ACCD, pending) has released preliminary information about its upcoming planned IPO. According to the Nasdaq, Accolade filed last Friday for a $100 million public offering. Underwriters include Goldman Sachs (GS), JP Morgan (JPM), and Credit Suisse (CS) among other banks.

The $100 million figure is a placeholder used to calculate filing fees, and we do not know Accolade’s planned valuation. However, McKesson Ventures reported last June that Accolade had a valuation of $620 million.

Yet recent IPOs, most notably the Casper (CSPR) debacle, has seen valuations fall dramatically as investors look at the numbers and storyline. With regard to Accolade there are reasons to be concerned about their business plan and financial numbers. Here are some of the key considerations.

Trying to improve Healthcare

Healthcare is complicated and expensive. Not just for workers, but for employers who offer healthcare benefits to said workers. Accolade argues that it can help customers engage and better understand their health benefits, which will let them take less expensive and more effective solutions which will help customer and employer alike.

In its SEC report, Accolade states that “the total annual employer cost for healthcare is estimated at more than $10,000 per employee” and that these costs are expected to keep rising without improving health outcomes. Accolade thus uses its own clinicians and health assistants, as well as a technology platform that uses machine learning and artificial intelligence. Accolade’s customers are large businesses with extensive healthcare plans, and Accolade states that its “primary offering was shown to reduce claims costs for an employer with more than 10,000 members by 6.5%, or $782 per employee per year.”

Accolade possesses high growth potential and argues that its total addressable market is $24 billion, and everyone knows that spending on healthcare will continue to increase over the next several years. Furthermore, Accolade has secured investors and partners, such as a $20 million investment from health insurance giant Humana (HUM).

But there are some major problems. Accolade has such high growth potential in part because it has so few customers. The company states that it has 53 customers as of the time of this prospectus, but Comcast (CMCSA) accounted for 35% of its 2019 fiscal year revenue. This is an improvement compared to 45% in 2018, but Accolade is also heavily dependent on Lowe’s (LOW) and United Airlines (UAL) as well.

Then there is also the problem of competition. Accolade believes that “no single competitor offers a similarly comprehensive platform”, but it names large health insurance companies like Aetna (AET) and Cigna (CI) among its competitors in addition to smaller healthcare platforms like Grand Rounds and Castlight. Accolade will need to continue to win clients that will reduce its dependency on just three companies and show that it can continue to provide effective service.

Financial Concerns

Despite some of these concerns, Accolade’s financial numbers are fairly strong for an IPO. The company follows the typical IPO model of reporting strong revenue growth in addition to high net losses. In fact, Accolade is unusual in that its revenue growth rate has increased, from 23% from the fiscal years ending 2018 and 2019 to 49% from the 2018 to 2019 calendar years. Furthermore, gross margins improved to 42% in the nine months ending November 30, 2019 from 28% over the same timeframe in 2018.

Accolade did report a net loss of $56 million in the 2019 fiscal year and sent out the typical IPO warning that this company has not been profitable and may never be. I am also concerned about its debt load, with just $68 million in total assets balanced against $99 million in total liabilities and an accumulated deficit of $318 million.

Finally, while Accolade’s unique niche does speak to its ability to stand up against larger competitors, it does make it more difficult to evaluate the company. The healthcare sector on average had a P/S ratio of over 4, while Accolade at the earlier valuation of $620 million would have a P/S of 6.54. Even that number is small when one factors in Accolade’s debt as well as the fact that it will probably chase an even higher figure.

Final Thoughts

As we do not know Accolade’s final planned valuation, we cannot comprehensively state whether this IPO is a worthwhile investment or not. But while Accolade has a stronger business model than most IPOs, there are concerns about its high debt, lack of profitability, and what will probably be a significantly higher valuation compared to other companies.

Given these factors, Accolade at the very least does not appear to be a slam dunk for an IPO and so investors will probably be better off playing it safe and waiting to see how the stock performs. A valuation closer to $620 million could make for a solid target given its growth potential.