-$0.89
$4.83
bear -$0.89
base $2.87
bull $4.83
margin of safety $1.40
market price* $8.28
Business condition attached to the margin of safety
Alignment's Medicare Advantage plans keep CMS Star ratings of 4.0 or higher, covering substantially all members, in the next Star ratings CMS publishes.
What the business is. Alignment Healthcare runs Medicare Advantage health plans. Its licensed plans contract directly with the federal Centers for Medicare & Medicaid Services (CMS), which pays a fixed monthly amount for each enrolled senior; in return Alignment carries the full cost of that member's hospital, doctor and prescription-drug care. Profit is the thin gap between what CMS pays and what care costs. Payment rates depend on where members live, how sick they are, and the plan's CMS Star rating: plans rated 4 stars or higher earn bonus payments. As of January 1, 2026, about 100% of members were in plans rated 4.0 stars or better for the 2027 payment year. Membership reached 236,300 at December 31, 2025, and for the 2025 plan year the company sold in 45 markets across California (22), North Carolina (16), Arizona (3), Nevada (2) and Texas (2). About 84% of members are in California, so the business is concentrated in one state's rules, provider costs and CMS benchmarks. The record. Revenue grew from $1.17 billion in 2021 to $3.95 billion in 2025 and was $2.57 billion in the first half of 2026 against $1.94 billion a year earlier. Growth came well before profit. Measured as the cash owners could take out after stock-based pay (a real cost, $62 million in 2025) and after the capital spending needed to stand still, the business lost roughly $127 to $189 million every year from 2021 to 2024. 2025 was the first positive year: about $23 million, or $0.11 a share, with reported net income roughly break-even. The first half of 2026 was clearly better, with net income of $48.0 million against $6.6 million in the first half of 2025, and both 2026 quarters were profitable. In these figures we strip out swings in receivables and claims owed to doctors and hospitals, because they reflect timing and growth rather than earning power. How we valued it. Because every year before 2025 describes a start-up still losing money on its way to scale, those years do not represent the business as it now exists. We start from 2025 (about $0.18 a share before the $13.8 million of interest paid on its notes). We then move the level up using the two profitable 2026 quarters. The second half has been weaker than the first (in 2025 the first half was profitable and the second half lost money), so we do not simply double the first half. For comparison, 2025 cash earnings improved by about $150 million from 2024's loss. The base case assumes a further, smaller improvement to about $95 million a year before interest, which is already visible in the first-half 2026 results. Future cash is discounted at a flat 6%. We credit no membership growth beyond members already enrolled. New members must be won again each enrollment season, and the company's past growth was funded by outside capital rather than its own cash, so we treat it as not yet proven to repeat on its own. We credit no margin expansion and no new markets. The company had $617 million of federal and $531 million of state tax-loss carryforwards at the end of 2025. These shelter profits for several years, and after that the cases carry full income tax. Base case, about $2.87 a share. Earnings hold near the 2026 level of roughly $95 million a year before interest while the tax losses are used up, drop to about $75 million once full tax applies in the mid-2030s, and then fade out over ten years. We give no value beyond that, because no contract or structural feature guarantees the Star ratings and CMS rates the plan depends on. The business is worth about $817 million. Against that it owes $330 million of 4.25% convertible notes due November 15, 2029 (conversion price about $16.04), offset by about $130 million of cash we judge surplus. That leaves about $617 million for shareholders on roughly 215 million diluted shares. The surplus-cash figure is a judgement. At June 30, 2026, current assets exceeded current liabilities by about $477 million, but much of that must stay inside the regulated health plans. Those plans held $268.5 million of regulatory capital at the end of 2025 against a $116.1 million minimum, and only $72.9 million could be paid to the parent without approval. We assume that requirement grows with 2026 premiums. We do not reduce the debt for its below-market coupon, because holders were compensated for that with the conversion right. Bear case, about -$0.89 a share. Profits slip back to the 2025 level of about $36 million a year before interest for three years, then fade to nothing by 2036. The named risks behind this path are the thin margins shown by four straight loss years through 2024, the heavy dependence on California, and the Star ratings, which must be re-earned every year. CMS risk-adjustment audits are another: CMS has selected the California HMO for an audit of payment year 2019 and said in May 2025 that it intends to audit every eligible plan each year. A federal court in Texas vacated the rule allowing CMS to extrapolate audit findings on September 25, 2025, but the outcome is not settled. In this case the business is worth about $174 million. It owes about $365 million: the $330 million of notes, no surplus cash, and an allowance for refinancing the 2029 maturity at higher rates. The company would owe roughly $190 million more than it is worth, leaving nothing for shareholders. Bull case, about $4.83 a share. The first-half 2026 profit level holds through the whole year and is sustained at about $125 million a year before interest while tax losses are used, then about $99 million after full tax for ten more years before fading. The business is worth about $1.22 billion against about $184 million of net debt, which includes the benefit of the 4.25% coupon running to 2029. What would make this wrong. The company's filing warns that failing to keep its Star ratings could have a direct and substantial adverse impact on revenue, and losing 4-star status would remove bonus payments from a business whose margin is already thin. Medical costs rising faster than CMS payments, or a large audit repayment, would push results toward the bear case. On the upside, these cases leave out future membership growth. If the company keeps adding members profitably and pays for that growth from its own cash, the shares would be worth more than the base case, but it has only about eighteen months of profitable results so far (2025 and the first half of 2026). Margin-of-safety price. Because the bear case is below zero, price alone is not enough. The margin-of-safety price of about $1.40, roughly half the base value, applies only if the plans keep ratings of 4 stars or higher in the next CMS Star ratings.