Morgan Stanley: Digital Health 2.0 Era, Firmly Bullish on HNGE and OMDA

Overview

This report originates from Morgan Stanley meeting points summary regarding North American healthcare technology. Core view: Leaders of the 'Digital Health 2.0' era, Hinge Health (HNGE) and Omada Health (OMDA), warrant doubled bullishness from investors. Although the market remains skeptical about the digital health sector, institutions believe these two companies have proven the sustainability of their business models through strong execution, momentum in the self-insured employer market, and AI-driven efficiency improvements. The report maintains an Overweight rating on both and notes current earnings forecasts are relatively conservative, leaving upside potential.

Core views

Hinge Health (HNGE): As the undisputed leader in the virtual Musculoskeletal (MSK) care sector, HNGE holds a market share approximately 2-3 times that of the second-largest competitor. Its coverage in the self-insured employer market grew from 19 million in 2024 to 22.6 million, with the non-self-insured segment achieving remarkable 135% YoY growth in 2025. Current penetration in its Serviceable Addressable Market (SAM) is only 8%, and member profitability (3.9%) is far below the 9% seen in the physical therapy market, indicating significant upside potential. Leveraging technology leverage, HNGE has achieved an 83% high gross margin, and operating margins are expected to rise further as sales leverage kicks in. Omada Health (OMDA): At an inflection point for multi-program cross-selling, which helps enhance growth durability and drive margin inflection. Beyond the preventive and weight management business accounting for ~75% of revenue benefiting from GLP-1 demand, customer feedback is positive in hypertension (~13%) and diabetes (~12%). By leveraging technology and AI to expand platform scale, OMDA increased members served per coach by ~25%, driving a 1100 basis point expansion in gross margin over the past two years to 63.2%. Management remains confident in achieving long-term gross margin targets above 70%. Other Stock Views: While Doximity (DOCS) recently saw revenue growth slow to 5%, raising competitive concerns, user engagement with its AI tool DoxGPT has increased significantly, with nearly half of active prescribing physicians using its AI tools; monetization potential awaits release. Waystar (WAY) faces long-term competitive threats from foundation LLMs and ambient AI transcription tools. While currently clearing house rails and payer connections remain barriers, the trend of medical providers reevaluating vendors to reduce costs may pose medium-to-long term risks.

Analysis framework

Institutions adopted a method combining 'Fundamental Differentiation Analysis' and 'Valuation Comparison'. First, comparing HNGE/OMDA performance with previous generation digital health IPOs, highlighting substantive outperformance in revenue growth, gross margin, and EBITDA margins to refute the market's negative narrative on the sector. Second, dissecting growth drivers for both companies, such as HNGE's MSK market penetration and OMDA's multi-condition cross-selling, combined with specific applications of AI in reducing labor costs and enhancing member engagement, to argue the logic of margin expansion. Finally, comparing multiples like EV/EBITDA and EV/Sales against peers and software sector medians to assess valuation rationality and upside space.

Methodology notes

• Valuation MethodEV/EBITDA valuation

  Valuation using Enterprise Value to EBITDA ratio

  The research report uses EV/EBITDA multiples to assess valuation levels for companies like HNGE, comparing against the first quartile mean of small-medium software peers to evaluate valuation attractiveness relative to growth potential.

• Valuation MethodPS valuation

  Valuation using Price-to-Sales (EV/Sales)

  For OMDA, which has not yet fully realized profit potential, the report uses EV/Sales multiples compared against median HCIT peers most relevant to determine its reasonable target price.

• Competitive and Strategic FrameworkMoat / competitive advantage

  Analyze enterprise leadership position in specific sub-segments and network effects

  The report emphasizes HNGE's 2-3 times larger scale advantage vs competitors in digital MSK field, and OMDA's data accumulation in chronic disease management, viewing them as key moats against competition.

• Industry/Industrial Analysis FrameworkPenetration S-curve

  Judge growth stage by analyzing product penetration in potential market

  The report notes HNGE and OMDA penetration rates in their TAM are only about 10%, indicating the industry is still in early stage with a long runway for growth.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hinge Health (HNGE.N)

  Beneficiary: Leader in virtual MSK sector, low penetration, AI-driven margin expansion

  Strengths

  Market share leads competitors 2-3 times, gross margin up to 83%, self-insured employer market growth strong

  Comparison

  Demonstrates superior revenue growth and EBITDA margin compared to peers

  Risks

  Execution risk, intensified competition, sales channel concentration leading to client churn

• Omada Health (OMDA.O)

  Beneficiary: Multi-condition management cross-selling inflection, driven by GLP-1 demand

  Strengths

  Synergy of multi-condition solutions, gross margin significantly improved, AI enhances labor efficiency

  Comparison

  Expected to catch up to HNGE in growth and margins

  Risks

  Intensified competition, lower than expected member engagement, macro uncertainty affecting demand

• Doximity (DOCS.N)

  Neutral-Bullish: Short-term growth slowdown, but AI tool DoxGPT offers new growth points

  Strengths

  Differentiated platform, AI search and transcription users doubled, hospital system coverage expanded

  Weaknesses

  Revenue growth slowed to 5%, facing pressure from emerging competitors like OpenEvidence

  Comparison

  In 'punishment zone', but AI monetization opportunity undervalued

  Risks

  Large pharma upselling disappointment, healthcare system spending pressure, intensifying competition

• Waystar Holding Corp (WAY.O)

  Neutral: AI debate still needs time to settle, watch August Analyst Day

  Strengths

  Clearing house rails and payer connection barriers high, AI embedded in some solutions

  Weaknesses

  Faces medium-to-long term substitution risk from foundation LLMs and ambient AI transcription tools

  Comparison

  Valuation slightly below related HCIT peers, reflecting uncertainty around AI pressures

  Risks

  AI and RCM player competition, Iodine integration delay, equity sponsor selling pressure

Key data

• HNGE Target Price$72.00Based on 20x EV/EBITDA multiple on 2027 baseline scenario EBITDA
• OMDA Target Price$30.00Based on 4x EV/Sales multiple on 2027 baseline scenario Revenue
• HNGE Gross Margin83%Achieved high gross margin, thanks to technology leverage
• OMDA Gross Margin63.2%Expanded 1100 bps in past two years, long-term target 70%+
• HNGE Self-Insured Employer Coverage22.6 millionGrew from 19 million in 2024
• OMDA Increase in Members per Coach~25%Thanks to AI and technology platform scaling

Impact & implications

The report believes HNGE and OMDA's success marks a '2.0 Era' for the digital health industry focusing on actual execution and profitability. For investors, this means abandoning stereotypes of old digital health model failures, instead focusing on companies utilizing AI for efficient scaling and building deep moats in specific clinical areas (e.g., MSK, chronic diseases). Continued outperformance by these two companies may reshape valuation logic for the entire MedTech sector, attracting capital back to leading firms with genuine cash-generation capabilities.

Risks

• Execution Risk: Company fails to achieve growth or margin targets as planned
• Intensified Competition: Emerging AI healthcare companies or traditional giants entering sub-segments
• Macro Uncertainty: Affects employer procurement decisions and sales cycles
• Sales Channel Concentration: Major client churn could have significant impact on performance
• Lower than Expected Member Engagement: Affects long-term renewals and revenue stability

What to watch

• Whether HNGE and OMDA subsequent quarters revenue and margins continue to exceed expectations
• Progress on OMDA's multi-condition cross-selling and adoption of GLP-1 supported programs
• Waystar's detailed guidance on AI strategy and response to competition at August Analyst Day
• Doximity's DoxGPT monetization progress and procurement by large hospital systems