NNOX - Nano-X Imaging: A Very Exciting Opportunity That I Want To Be Part Of

2023-07-19 05:40:29 ET

Summary

• Nano-X Imaging's share price has seen a significant increase due to its expansion of global operations and the development of a revolutionary X-ray machine.
• The company recently gained clearance from the US Food and Drug Administration to begin marketing Nanox.ARC, a major step towards operating as a functioning healthcare company.
• Despite the potential for high returns, investing in NNOX is considered risky due to the company's negative net income and high valuations, and the inherent uncertainty in biotech ventures.

Investment Outline

Nano-X Imaging ( NNOX ) has experienced a massive upswing in the share price in the last few months, going from around $6 per share to over $15 now. That move seems to have been fueled by the fact that NNOX is rapidly expanding and introducing more global operations. This should be a tailwind for the top and bottom line which has gotten investors' interest, resulting in the rise. Despite that, the earnings are still negative and aren't expected to be positive until 2025.

NNOX is based in Israel and operates as a medical device maker. They are developing a revolutionary X-ray machine that could take the market by storm and result in NNOX growing revenues quickly. I think that the technology that NNOX is developing is quite frankly revolutionary and with ? of the world not having any meaningful access the work they are doing is incredibly important in broadening access to it. Sometimes when you have a strong conviction you enter a position despite it not having a profitable bottom line yet, such is the case with NNOX right now and I am rating them a buy.

Recent Developments

On May 22, 2023, NNOX announced their Q1 FY2023 results, and the markets were very satisfied with it seeing as the share price rose over 100% in the span of a few months. The company noted that on April 28 they gained clearance from the US Food and Drug Administration to begin marketing Nanox.ARC, which also included Nanox.CLOUD as a stationary X-Ray system. The clearance allows the products to produce tomographic images. With no meaningful amount of revenues generated in the last few years, this annulment is a major step forward to successfully operating as a functioning healthcare company, with revenue growth and strong margins.

The company has established some products in its portfolio but they are still developing and I expect we will see more generations of their technology in the coming years. The market for X-ray machines is expected to grow at a steady rate of 6.5% over the coming 10 years, but if NNOX can produce something far superior to what is currently available, I think they will experience far better growth and results. Just looking at Q1 for example the revenues grew by 33% YoY.

Seeing NNOX develop its portfolio of products will be a major tailwind point I think. If they can capture the growth of their current product and build a strong balance sheet they should prioritize making strategic acquisitions in the industry. That will in time help create a fantastic base of earnings and revenue streams to rely on whilst still investing heavily into their new technologies.

Margins

The margins of NNOX are as you might expect quite non-existent. The company is still in the early days of ramping up production. Luckily, the company is establishing contracts and partnerships already with key customers. In the Q1 FY2023 report the company mentioned they entered into a three-year distribution pre-sale agreement with Vital Tech SARL in Morocco to deploy 270 Nanox.ARC.

As I mentioned earlier, the exceptions for NNOX are right now that they will be profitable by 2025, with an EPS of $1.04. With revenues expected to be $243 million in that year. I think we will continue to see some share dilution and reaching 70 million outstanding shares by then isn't that unrealistic I think. That would be a net income of $72 million by then. That would represent a 29% net margin. I think that is far higher than what we might see pan out. It seems like too fast for them to reach that, and a 10% net margin might be more reasonable. That would still be around $24 million in NI and a p/e of 45. That is very high, but I think we will see far superior YoY revenue growth than the industry. With this revolutionary technology, I think an EPS growth of around 15 - 20% will be seen and that is worth paying a 45x premium for in all honestly.

Risks

Biotech investing undoubtedly ranks among the riskiest sectors in the stock market, demanding a patient and cautious approach. The unique challenges and lengthy timelines involved in getting scientific breakthroughs approved by regulatory bodies make biotech ventures inherently uncertain.

A critical factor contributing to the high-risk nature of biotech investments is the stringent regulation imposed by the FDA (Food and Drug Administration). Before any pharmaceutical drug or medical device can be commercialized, it must undergo rigorous testing, clinical trials, and approval processes, which can take years to complete. This prolonged period of uncertainty can result in substantial financial and time investments without any immediate returns.

Nonetheless, the high-risk nature of biotech investing also presents opportunities for substantial rewards. Successful regulatory approval can lead to explosive growth and significant market gains for investors. The key to mitigating risk in this sector lies in in-depth research, understanding the potential of a company's science, and monitoring its progress in clinical trials and regulatory processes. But as I will conclude the article with, I think that investors are right now best off making a smaller investment into NNOX. It's all about your comfort with risk. I still view NNOX as a risky investment, as one should when the NI is negative and valuations very high. I expect a lot of volatility going forward and a large portion of a portfolio in NNOX could generate large value swings, which I am looking for.

Investor Takeaway

I don't think it's fair to say that NNOX isn't a risky investment. The technology they are developing is new and revolutionary. The promises about strong growth are high and I think if there are any roadblocks in the years to come the share price will decrease significantly. But on the other hand, any positive news will likely cause it to skyrocket. Investors should view NNOX as a very volatile and somewhat risky investment and portion their investments accordingly. I wouldn't hold more than 1 - 2% of my total portfolio in the business as I don't appreciate or like the added volatility it would give. But I see NNOX offering a lot of potential and a buy rating should still be applied, whilst watching the coming reports very carefully.

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