ATRC - AtriCure: Appeal Lures For This Cure

2023-11-10 14:59:56 ET

Summary

• AtriCure has seen solid revenue growth but needs more operating leverage to improve its bottom line.
• The company's shares have experienced a meaningful pullback from their highs in June.
• Despite continued losses, AtriCure's progress on the margin front and expected sales growth in 2024 make its sales multiple compelling.

Over the summer, I believed that operating leverage was required as a cure in the case of AtriCure, Inc. ( ATRC ). The company saw continued momentum in Afib and related markets, and while solid revenue growth was seen, more operating leverage was needed to hit its bottom line.

Over the past two quarters, AtriCure has delivered on just that, which in combination with the lower share price certainly has improved the risk-reward here, albeit with a speculative element to it.

About AtriCure

AtriCure was founded in the year 2000 as a developer of innovative surgical devices used to create precision lesion in cardiac and soft tissues. The company has developed the Isolator Synergy Ablation System, the first medical device which has received FDA approval for the treatment of persistent Afib, with related devices and technologies used to treat cardiac patients.

The business went public back in 2003 as a $12 share granted the business a $100 million valuation at the time. This looked relatively reasonable in relation to a $38 million revenue base, although this was accompanied by a sizeable $15 million loss, as continued losses made that shares fell to just the $1 per share mark during the economic crisis.

After broadening of product/procedure approvals, revenues grew to the $100 million mark in 2014 as shares recovered alongside growth in revenues, with revenues doubling through 2019 again, when sales came in around $200 million, causing shares to rally to their forties at the time.

A Boom Bust

Like so many companies and shares, momentum was seen in the case of AtriCure as well coming out of the pandemic. Shares of the business rallied to a high of around $80 per share during 2021, as shares had fallen to levels in the high-forties in June of this year when I last looked at the shares.

After a tougher 2020 (for obvious reasons), revenues recovered to a record of $274 million in 2021, as reported earnings were distorted by a range of items, both good and bad. Adjusted losses increased from $42 million in 2020 to $52 million in 2021, a bit disappointing, given the momentum on the top line.

AtriCure posted a 20% increase in 2022 sales to $330 million, as GAAP operating profits narrowed to $42 million, equal to $1.02 per share. The company guided for 2023 sales to rise further to $380-$387 million, with adjusted losses seen between $1.14-$1.19 per share, as the lack of operating leverage was not too comforting.

With first quarter results (as released in May) revealing that revenues were up by 25% to $93 million, adjusted losses narrowed to $0.14 per share. With 46 million shares outstanding, the company was awarded a $2 billion enterprise valuation in June, equal to about 5 times sales as the full year sales guidance was hiked to $385-$392 million.

While such a sales multiple looked much more reasonable, certainly given the momentum on the top line, the issue is that the company continued to post substantial losses, albeit coming down a bit.

Expectations Come Down Further

Since June shares have actually traded a bit higher over the summer, before selling off to lows around $35 per share at the moment of writing, as shares have experienced a meaningful pullback from the levels seen in June.

In July, AtriCure reported a 19% increase in second quarter sales to $101 million, as GAAP operating losses narrowed to just $4.4 million (comparing to a $5.8 million loss in the first quarter and a $13.7 million loss in the second quarter of 2022). The company upped the full year sales guidance to $392-$395 million, with adjusted EBITDA seen around $12 million. Notably, the EBITDA guidance feels a bit underwhelming after second quarter adjusted EBITDA totaled $8 million, suggesting a mere $2 million EBITDA contribution seen in the second half of the year.

In November, AtriCure posted an 18% increase in third quarter sales to $98 million, in what seasonally is a bit of a softer quarter, with operating losses reported at $8.1 million. The EBITDA number of $4.7 million looks solid but is highly adjusted with among others an $8.7 million stock-based compensation expense.

For the year, the company now sees sales at $395 million, plus or minus a million. Adjusted EBITDA is now seen at $18-$20 million, which implies that based on the performance so far this year, the company sees fourth quarter revenues of around $102 million, and adjusted EBITDA of around $4.4 million.

The 46 million shares now grant the company a $1.6 billion equity valuation at $35 per share, as this valuation even includes a modest net cash position of $71 million, which is gradually coming down amidst continued losses. The resulting >$1.5 billion enterprise valuation is equal to less than 4 times sales here, as some real progress is made on the bottom line.

And Now?

Many medical device makers have been selling off on the potential breakthrough of so-called GLP-1 receptors which have the potential to reduce weight of patients en masse. Of course, this will reduce the need for many treatments, and it could potentially impact the patient group of AtriCure (over time) in a big way.

Trading at less than 4 times sales, the sales multiple looks quite compelling with still near 20% revenue growth reported here, certainly as much-needed progress has been made on the margin front. While GAAP losses still came in at 5% of sales so far this year, the company has seen about a ten-point improvement in margins over the past twelve months, something which is rather impressive.

Even more comforting, the company already believes that sales growth will exceed the long-term trajectory of 15% in 2024, which likely bodes well for operating leverage as well. This could reduce the burn rate further, or perhaps result in real break-even results. AtriCure, Inc. stock is rather compelling given the sales multiple, as now feels like the time to get upbeat on the shares here.

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