Why Castlight Health Inc. Is SkyrocketingToday

By Markets Fool.com

What:Shareholders ofCastlight Health, a cloud-based software provider focused on health benefits management,are having a great day. Castlight's stock is up more than 25% as of 12:25 p.m. ET after news broke that IT giantSAP has entered into a strategic partnership with the company and is making an equity investment in it as well.

Continue Reading Below

So what:Castlight Health and SAP announced that they have entered into a multipart strategic alliance with the goal of combining technologies that will lead to "lower healthcare costs, improve outcomes and increase benefits satisfaction. "

Castlight has agreed to be an early participant in SAP's newly announced Connected Health Platform, which is its new system that's designed to connect developers, researchers, and healthcare organizations together. In addition,the two companies plan to integrate Castlight's health benefits platform into SAP's SuccessFactorsHuman Capital ManagementSuite.

The two companies plan to launch a pilot program of this alliance later this year.

Separately, SAP also announced that they have bought 4.76 million millions shares of newly issued Class B common stock, giving it a 4.7% ownership position in Castlight. The shares were purchased for $3.77 each, which represents a substantial premium to their $3.20 closing price on May 17, which was the day prior to the deal being announced.

As part of the purchase SAP also received warrants that entitled it to buy up to 1.9 million additional shares of Class B common for $4.91 per share, assuming certain conditions are met.

Continue Reading Below

Now what:Giovanni Colella, the CEO of Castlight Health, had this to say about the deal:

Castlight is very honored to work with SAP as they build and grow the network aroundSAP Connected Health. There is tremendous synergy between Castlight and SAP's vision for connected health as well as its existing and market-leading HCM suite.

I think that investors were right to cheer this news as SAP is a major name in the technology space, so seeing them sign a strategic deal with Castlight should give the company a major credibility boost with customers and the investment community. The latter is especially needed right now as Castlight's stock has performed horrifically since its 2014 debut. Any long-term shareholder in this company is currently sitting on a substantial loss.

While the deal is exciting, we won't know if it will help to turbocharge the company's growth rate for quite some time since it won't be rolled out until later this year. For that reason, potential investors might want to take a wait-and-see approach before they buy shares.

The article Why Castlight Health Inc. Is SkyrocketingToday originally appeared on Fool.com.

Brian Feroldi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.