NNOX - Nano-X Imaging - Some Good Some Bad

2023-07-18 15:01:59 ET

Summary

• Israeli medical tech firm Nano-X Imaging is the top-rated healthcare equipment stock as per Seeking Alpha's Quant Rating.
• We explore what's behind the hype and lay down a few concerns.
• We conclude with our thoughts on the valuations and the technicals.

Introduction

Nano-X Imaging ( NNOX ), is an Israeli-based medical tech firm that was incorporated less than five years ago (December 2018), and made its listing debut in August 2020. Within the broad medical tech spectrum, NNOX's area of specialization lies in the field of medical imaging.

NNOX piqued our interest when its recent momentum on the bourses was instrumental in sending it to the top spot in Seeking Alpha's Quant Rating System, trumping 154 other healthcare equipment stocks in the process.

What's All The Fuss About?

One of NNOX's cardinal goals is to make medical imaging and radiographic visualizations more accessible to the world at large. A few months back, NNOX got a shot in the arm, when the US FDA provided 510[K] clearance to the company to market its "multi-source" cold-cathode-based X-ray system (Nanox.ARC) in professional healthcare facilities or radiological environments.

Marketing clearance was granted even to Nanox.CLOUD, the cloud-based infrastructure associated with Nanox.ARC. Do note that NNOX's "single-source" X-ray device (Nanox Cart X-Ray System) had already previously received a 510[K] in Q2-21.

NNOX management believes their systems offer a competitive edge as their imaging systems are smaller, and less complex than what's available in the market. Crucially they also believe their low-cost positioning could help ensure deeper penetration across the globe, so long as the regulatory environment is supportive.

Speaking of the regulatory environment, we ought to mention that NNOX's recent clearance should not have come as a great surprise. Even before NNOX received it, quite a few reports were suggesting that the FDA floodgates were opening for various medical imaging-based AI applications.

Whilst this is encouraging news, investors should also not get overly carried away with a 510[K] clearance, as the level of rigor and scrutiny compared to a PMA (Premarket Approval) is not even close. In fact, studies have shown that systems cleared through the 510[K] process are 11.5x more likely to be recalled than devices that were put through a PMA process.

Also consider that in isolation, these NNOX's ARC systems are unlikely to be a game-changer and will need to be used as a supplement to conventional radiography tech, so the question of true displacement is still very much up in the air.

For even more validation of NNOX's IP, investors would do well to keep an eye on developments coming out of Israel in H2-23. Earlier in the year, the Israeli Ministry of Health had paved the way for NNOX to put its ARC through a clinical trial, to gauge its diagnostic potential with chest and lung diseases. This will take place in H2-23, and the results of the trial could be instrumental in determining the stock's next course of action.

Investors also need to ponder if this business has the requisite financial and operating chops to flourish at a larger scale. According to the AR, their Nanox ARC units were made by a third party (Dagesh PK), on a purchase order basis (which is certainly not conducive if you want to scale up), although a few months back NNOX management also did imply that they were also establishing an assembly line.

Financially, the business is also in great shape. When they made their debut in the markets, they had around $213m of cash and marketable instruments on their books. However, every other quarter, their operations have been sucking out close to $11m of cash per quarter (the rolling 5-quarter average). Meanwhile, over the last three quarters, they've also been cashing in on their marketable securities to generate funds ($11-12m of inflows) without being in any position to reinvest.

All in all, the total cash and short-term marketable instruments on the books have slumped by 67% and currently only stand at $78m.

Closing Thoughts: Stock-related Commentary

Business-wise a lot of things appear to be up in the air for NNOX, but the technical and valuation sub-plots look a bit more pleasing.

For large parts of its trading history, NNOX was priced within an exorbitant forward price-to-sales band of 30-60x; that is no longer the case, with the stock now trading at less than 15x forward P/S (based on the FY24 sales estimate).

Also consider the quantum of sales growth you'd be getting at that P/S multiple. Over the last few quarters, NNOX has been delivering roughly $2-$2.4m of topline per quarter (translating to less than $10m annually) consisting mainly of teleradiology-related services. If you're prepared to be guided by what Wall Street thinks, in less than 18 months, you could be looking at a business with a revenue profile of roughly $15m per quarter. Put another way, NNOX's revenue CAGR between FY22 and FY24 will likely be above 60% with the company poised to hit almost $60m of sales by FY24. Getting 60% topline growth at a P/S of 15x is certainly not bad at all.

Looking at NNOX's weekly chart, we can see that it had been losing plenty of ground for two years, forming price imprints in the shape of a descending triangle. The downtrend came to an end in May when the stock broke past the upper boundary of the triangle on exceptionally strong volumes that were around 8-10x higher than the typical weekly average.

Volume spikes of this ilk are more often than not driven by the institutional cohort (the image below validates the pickup in institutional interest in May), which certainly reflects well on the stock's overall visibility quotient (even though the volume has abated it is still a lot higher than what was seen 3-6 months back, giving you a sense of the scale of the participants that are now engaging with this ticker).

Coming back to the weekly chart, we can see that NNOX failed to break into an old congestion zone and consolidate there (area highlighted in yellow); rather what we're seeing right now is a bull flag pattern, with the first leg of the pullback currently underway. We reckon it would be sensible to wait for a few more weeks to see if NNOX flattens out at current levels and builds a base here before contemplating a long position.

It's also worth noting that the recent spike has done little to scare away the short-sellers. In fact, the short-interest hit record highs last month, even as the percent of float that is short (over 7.5m) is quite elevated, and is at its highest point in over a year.

Finally, we'd also like to think that NNOX could attract those fishing for suitable rotational opportunities within the Israeli stock universe. Note that relative to the Van Eck Vectors Israel ETF ( ISRA ), NNOX's strength is still around 60% off the mid-point of the life-long range, and may benefit from some mean-reversion.

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