SGHT - Sight Sciences: All Eyes On Growth

2023-03-17 13:21:09 ET

Summary

• Sight Sciences posted strong revenue growth and narrower losses in the most recent quarter.
• I expect Sight Sciences to sustain a fast pace of topline expansion in 2023 and beyond, considering its Q4 2022 metrics and growth potential for its core OMNI product.
• I am assigning a Buy rating to Sight Sciences, as I think that a single-digit forward Enterprise Value-to-Revenue multiple undervalues the stock in view of its growth potential.

Elevator Pitch

My investment rating assigned to Sight Sciences, Inc. ( SGHT ) stock is a Buy. SGHT's Q4 2022 financial performance was pretty good, and the company's 2023 growth outlook is reasonably favorable. My Buy rating for SGHT is premised on the point that Sight Sciences should be able to trade a higher valuation multiple when the market acknowledges its growth potential.

Business Overview

As per its media releases , SGHT calls itself "an eyecare technology company" offering products relating to "prevalent eye diseases."

Sight Sciences' Key Products

Surgical glaucoma (OMNI and SION) and dry eye (TearCare) products contributed 92% and 8% of Sight Sciences' total revenue, respectively, for full-year fiscal 2022 as indicated in its Q4 2022 results press release . In the company's 10-K filing , SGHT describes OMNI and SION as a "single use, therapeutic device" used to "reduce IOP (intraocular pressure)" and a "bladeless, manually operated device" utilized to excise trabecular meshwork," respectively. Separately, TearCare is referred to as a "device designed to melt and remove meibomian gland obstructions" in its 10-K .

SGHT's Recent Quarterly Financial Performance Was Good

Sight Sciences' losses narrowed in the fourth quarter of 2022 , and the company continued to record solid topline growth for the most recent quarter.

SGHT saw its revenue increase by +40% YoY and +10% QoQ to $20.5 million in Q4 2022. The robust +40% topline expansion registered by Sight Sciences in the recent quarter was largely driven by new account growth for TearCare and a ramp-up in sales contribution from its new product, SION.

In December 2021, Sight Sciences disclosed that TearCare obtained "FDA 510(k) Clearance" for the "treatment of Meibomian Gland Dysfunction" or MGD. This set the stage for SGHT to add in excess of 400 new accounts for TearCare in 2022, which helped to grow the sales contribution from its dry eye product segment by +122% YoY to $1.8 million in Q4 2022.

On the other hand, revenue for Sight Sciences' surgical glaucoma product segment rose by +35% YoY to $18.8 million in the final quarter of the previous year. SGHT's new surgical glaucoma product, SION, was only introduced to the market in August 2022, so Sight Sciences only started benefiting from a full three months of revenue contribution from SION in the recent quarter.

SGHT's net loss per share improved from -$0.50 in Q2 2022 and -$0.46 in Q3 2022 to -$0.35 for Q4 2022. The actual fourth quarter net loss reported by Sight Sciences turned out to be a positive surprise; the Wall Street analysts had previously anticipated that SGHT will announce a much wider net loss per share of -$0.42 for Q4 2022.

Sight Sciences noted at its Q4 2022 results briefing that the company's "operating loss and cash burn will continue to decrease as our business model begins to flex the considerable operating leverage." The positive operating effects that SGHT benefits from, as the company's topline expands, are reflected in its key cost-to-revenue ratios. SGHT's selling, general & administrative (SG&A) expenses as a proportion of sales decreased from 157% in Q4 2021 to 140% for Q4 2022. Over the same period, Sight Sciences' research & development expenses as a percentage of revenue declined from 30% to 26%.

Sight Sciences Is Well-Positioned To Deliver Solid Results For 2023

Based on the mid-point of the company's management guidance outlined in its Q4 2022 results release, SGHT sees itself delivering a topline of $91.5 million for full-year FY 2023 which translates into a revenue growth rate of +28%. The current Wall Street analysts' consensus 2023 topline estimate for Sight Sciences is $91.6 million , which is pretty close to SGHT's financial guidance. The sell-side also expects SGHT's normalized net loss per share to narrow from -$1.80 for FY 2022 to -$1.36 in FY 2023.

It is very likely that OMNI, the main product for Sight Sciences' core surgical glaucoma product segment, will continue to perform well this year based on an analysis of key metrics for the recent quarter.

As disclosed at its most recent quarterly results briefing, the number of active accounts for OMNI increased substantially by +24% YoY in Q4 2022, while OMNI's retention rate related to developed customers was in excess of 99%. These metrics suggest that surgeons have considerable confidence in the efficacy of Sight Sciences' OMNI product.

As an indication of potential growth opportunities in the short to medium term, Sight Sciences highlighted in its January 2023 corporate presentation slides that about 60% of the surgeons with the capability to do Microinvasive Glaucoma Surgery or MIGS haven't yet to be trained to utilize the OMNI product. Also, SGHT's FY 2022 surgical glaucoma product segment revenue of $66 million only represented around 1% of the $6 billion Total Addressable Market or TAM for surgical glaucoma in the US, which points to a long growth runway ahead.

The continued growth for the key OMNI product should lead to solid topline expansion and narrower losses (positive operating leverage effects as touched on in the prior section) for the company in the current fiscal year.

Closing Thoughts

SGHT currently trades at a consensus forward next twelve months' Enterprise Value-to-Revenue multiple of 3.5 times (Source: S&P Capital IQ ). Taking into account the company's expected topline growth of +28% and improved bottom line for FY 2023, I expect Sight Sciences to command a higher mid-single digit Enterprise Value-to-Revenue valuation multiple when it delivers a good performance this year. As such, I am of the view that a Buy rating for Sight Sciences, Inc. is appropriate.

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