BFLY - Butterfly Network: A Speculative Stock Still Losing Money

Summary

• We previously traded this name, but Butterfly Network has been crushed down to the $2 level.
• This comes as growth is slowing.
• Butterfly Network's Q4 results indicate that revenue growth has stalled, though 2023 revenues should grow about 20%.
• With Butterfly Network losing money, and with debt on the balance sheet, the Street is abandoning this name.

Butterfly Network, Inc. ( BFLY ) is an innovative health tech company that once showed a lot of promise. While its technology is amazing, the company is losing a lot of money, and the Street is abandoning the stock, as evidenced by the severe decline in shares to the $2 level. From here, Butterfly Network, Inc. is a very speculative bet.

We would bet on the tech, but this stock is in a much different shape compared to where we traded it in 2021. Butterfly Network, Inc. is best known for being a digital health company that offers a handheld, whole-body ultrasound. Again, the tech is cool. Before Butterfly, the idea that thousands of ultrasound devices would be implemented in a single health system was not possible. The company has this device and associated software. The company was growing like wildfire, but growth has stalled. The Q4 results suggest growth will resume in the back half of 2023, but the company is a long way off from making a profit in our opinion.

The losses the company posted were significantly better than expected, and that is why BFLY shares are exploding higher right now. The company is losing less money than expected. That is a plus. The outlook was positive for the back half of 2023 as well. However, the company missed on the topline, and for a stock with a still high valuation , given that there are no earnings, and we are pricing the stock on a revenue multiple per share, missing on this line is a negative outcome.

The topline revenue growth simply stalled. The revenues flat-lined to $19.0 million in Q4 vs. the same $19.0 million in Q4 2021. That is not good when the stock is priced for revenue growth. Now, it was not all bad, as total 2022 revenue was up 17.3%, but this is way down from the growth we saw in the years before this. The rapid growth has slowed. Even at $2, this is the type of stock priced for revenue growth. That said, for 2023, Butterfly Network, Inc. sees revenues growing quite strong, around 20% for the year. However, it makes no positive net income, so the goal here is to scale up sales, then profits will follow as opex is controlled. At least, that is the plan, but EBITDA is still a big losing figure.

With these results, the company missed estimates by a nasty $0.95 million. That is just not good enough. The stock is happy, however, with the earnings figures. The revenue is tied to both product and subscription revenues. Product revenue dropped 12% to $12.7 million from $14.4 million last year. The product revenue growth rate had been stalling the last few quarters and is now falling. The company is improving subscriptions and software sales, and it is translating to revenues. Software revenue increased 38.3% to $6.3 million from $4.6 million last year. We still see this line growing as time moves on and new software offerings are made available.

Gross profit came in at $9.6 million, compared to $7.5 million last year. Adjusted gross profit was $10.3 million, compared to an adjusted gross profit of $7.5 million a year ago. This is a big positive. Adjusted gross margin was 54.5%, compared to a 39.7%. This is a hidden positive, the gross profit line. However, operational expenses were up 11% to $58.6 million. These expenses were a result of growth initiatives and actually were less than the $60 million we thought the company would spend, and that led to better-than-expected EBITDA and the company losing less than expected. But it lost more money this year versus last year, and that is not great. Net loss hit $33.7 million, compared to a net loss of $15.1 million. This was a loss of $0.17 which was better than expected by $0.05. However, adjusted EBITDA was -$29.3 million, losing less than Q4 2021's -$35.6 million.

As we look ahead here, Butterfly Network, Inc. stock rallied because EBITDA losses should be down substantially. The company has started another cost reduction initiative with the goal of extending their cash runway into 2025. The company has actively worked to reduce cash burn. As a result, management guided full-year adjusted EBITDA loss in the range of $85 million to $95 million, down around 4% from 2022 EBITDA losses of $140 million. Further, sales will be up about 20% on the year. But the company expects a ramp in H2 2023. For Q1 2023, it sees flat results from a year ago. All in all, the Street likes this, and we are likely seeing some short covering in Butterfly Network, Inc., but this name remains very speculative.

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