Since its initial public offering in 2014, Castlight Health Inc. (NYSE: CSLT) has tanked 87%. And despite its decline, the stock continues to be overvalued. Insiders aren’t bullish on their own company, and quite frankly, investors shouldn’t be either.
Castlight’s collapse was caused by a number of obvious factors, with its own valuation being the clear issue. Shares initially priced the small cap at around $1.4 billion. With revenue only amounting to $13 million, this figure puts the firm’s value at 107 times its sales. What’s even more concerning is a large percentage of the company’s revenue is derived from one single client. On top of this, the company is using financing to fund their growing operating losses. Insiders aren’t even investing their own money in the company – they’re investing it elsewhere.
While prices have gone down, issues with the company’s operation and stock remain.
Why Investors Should Steer Clear of Castlight Health
One of the primary reasons why investors should steer clear of Castlight Health is because of the way the company’s management handles the stock itself. Once restrictions expired, massive insider selling occurred. Now, insider ownership accounts for less than 0.1%. Yes, share prices are significantly lower than the initial public offering, but insiders don’t even think the company is worth its current price.
Even though shareholders have seen an 87% drop in share price since the IPO, insiders have received a compensation increase of 71.31%. Giovanni M Colella, CEO, saw his compensation jump from $461,661 to $4,438,291 between 2013 and 2014. Altogether, the company’s revenue totaled $46 million in 2014. This means that insiders were given over $10 million, or 22% of the company’s total revenue.
The company’s short-term investments also grew exponentially from $67 million to $192 million. Insiders used their $190 million investment for trading securities and compensation. Essentially, insiders believe that they’ll get a better return by trading stocks instead of investing the money back into the business.
Typically, health enterprises would use such funds to increase customer awareness and marketing, purchase synergistic companies, or invest in research and development in order to remain competitive. Instead, insiders at Castlight Health use this money to pay executives, for trading securities and to keep the company afloat. The ultimate goal was to make a quick gain and potentially offset the fact that they cannot continue to operate under the company’s underlying business.
If insider behavior wasn’t enough to sway you from investing in this stock, the company’s client base should be. The majority of the company’s revenue came from one customer: Walmart (NYSE: WMT). Walmart accounts for 16% of Castlight Health’s revenue in 2013, and their contract with the company is set to expire in December 2015. While no official statements have been announced, it is possible that Walmart may drop the contract, hurting Castlight Health’s revenue even further.
If insiders aren’t even investing in Castlight Health and if the majority of its funding is going to compensation and keeping the company from going under, this is a clear sign that you should avoid this stock like the plague.