EOLS - Evolus: Negative Earnings Continue Despite Sustained Top-Line Growth

2023-12-15 10:13:35 ET

Summary

• Evolus stock failed to push higher after a bullish rating due to a prolonged consolidation period.
• Technical analysis suggests potential for a bullish breakout, but there are risks and uncertainties.
• Evolus' future growth and valuation are heavily reliant on product success and increased sales, with concerns about negative earnings and deteriorating shareholder equity.

Intro

We wrote about Evolus , Inc. (EOLS) in May'2021, when we stamped a 'Buy' rating on the stock post-Evolus' Q1 earnings in that fiscal year. The reason behind our bullishness at the time was the convincing earnings beat in that very quarter along with the sizable up move that took place earlier that year. Shares briefly surpassed $16 a share in 2021 as a result of the favorable decision by the (International Trade Commission) concerning the permission of Evolus's flagship product 'Jeuveau' to be sold in the US market.

However, as we see from Evolus' technical chart below, the stock failed to push on post our 'Buy' rating due to shares entering a prolonged consolidation period which has been the norm now for 30+ months. From a technical standpoint, (given the up move that preceded this consolidation), the pattern depicted below resembles a bullish pattern (long-term symmetrical triangle) in that we have two converging trendlines & a prior bullish trend. If indeed this is true, shares of Evolus could easily recover their 2019 highs of well under $20 a share before all is said and done. This is what management is implying in their earnings reports concerning how top-line sales growth for example is expected to drive profitability forward over the next five years or so. Technically though, (even at this stage), we see some risks to this assumption.

Firstly, look how far we are within the multi-year coil already. The longer the consolidation continues, the less trust I would put into this being a bullish pattern. Suffice it to say, that the share price should not arrive at the apex of the pattern as breakouts usually take place at approximately 75 to 80% of the horizontal width of the coil. This condition is pretty close to what we have now.

Normally in consolidation patterns, the total volume diminishes due to narrower price strings within the coil (what we have). However, if indeed Evolus' multi-year consolidation is pointing toward a bullish breakout, we should be seeing stronger buying on upmoves (concerning volume) as opposed to selling on downmoves. We verify this by going to the daily chart where it remains inconclusive that buying volume is essentially stronger than its selling counterpart.

Therefore, instead of focusing on the potential in Evolus at present, it is more important to evaluate the downside risk in this play as shares stooped to close to $3 a share in late 2020. Below are additional reasons why caution is advised in Evolus at this present moment in time.

Nature Of the Industry

In Evolus' recent Q3 earnings report, management announced record quarterly sales of $50 million. Furthermore, operating cash flow (-$900k) came in only slightly in the red which prompted management to state that Evolus was finally on a path of positive profitability. An increased number of consumer loyalty redemptions, & 650 new US accounts demonstrated sustained strength in the neurotoxin market as a whole despite recessionary fears. However, Evolus will have to continue to 'push the boat out' concerning its products such as

• how quickly Jeuveau will be able to gain traction in the US
• the success of Nuceiva in international markets
• the take-up of upcoming fillers (Evolysse) in the US over the next few years.

Suffice it to say, that the demand is there but the recent petition by Public Citizen to the FDA for example highlighted the forward-looking risk Evolus will be taking on if the company generates significant economies of scale. More products being sold mean more possibilities of serious side effects being reported over time, in that just a handful of adverse events could certainly dampen public opinion in Evolus over time.

Present Valuation Is All Based On Future Growth

Although operating cash-flow generation as mentioned may be heading in the right direction, this trend has not been helping shareholder equity, which continues to deteriorate. Evolus' equity at the end of Q3 this year fell to -$19.3 million, which has ramifications for the stock's valuation. If one were to remove Evolus' sizable amount of intangible assets & goodwill ($67+ million), this would demonstrate how Evolus is solely banking on accelerated top-line growth to finally reach profitability. As we see below, forward-looking sales revisions have been encouraging of late, although we have seen some softness over the past 30 days. Therefore, we believe any sustained softness in forward-looking expectations and the share price will struggle to gain traction over time.

Conclusion

Therefore, to sum up, given book value trends, concerns about the technical charts & continuous negative earnings, we are downgrading our rating in Evolus to a 'Hold' until further developments. Let's see what Q4 numbers bring. We look forward to continued coverage.

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