The past six months have been a windfall for eHealth’s shareholders. The company’s stock price has jumped 133%, hitting $10.04 per share. This run-up might have investors contemplating their next move.

Is there a buying opportunity in eHealth, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons why EHTH doesn't excite us and a stock we'd rather own.

Why Do We Think eHealth Will Underperform?

Aiming to address a high-stakes and often confusing decision, eHealth (NASDAQ:EHTH) guides consumers through health insurance enrollment and related topics.

1. Estimated Membership Hit a Plateau

As an online marketplace, eHealth generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

eHealth struggled to engage its audience over the last two years as its estimated membership were flat at 1.16 million. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If eHealth wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.

2. Customer Spending Decreases, Engagement Falling?

Average revenue per user (ARPU) is a critical metric to track for online marketplace businesses like eHealth because it measures how much the company earns in transaction fees from each user. ARPU also gives us unique insights into a user’s average order size and eHealth’s take rate, or "cut", on each order.

eHealth’s ARPU fell over the last two years, averaging 18.9% annual declines. This raises questions about its ability to engage users and signals its platform’s value is eroding.

3. EPS Trending Down

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for eHealth, its EPS declined by more than its revenue over the last three years, dropping 456% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Final Judgment

eHealth doesn’t pass our quality test. After the recent rally, the stock trades at 4× forward EV-to-EBITDA (or $10.04 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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