2023-07-31 06:06:55 ET
Summary
- Shares of Inari Medical have been lagging after seeing strong momentum post its IPO in 2020.
- The reversal of the share price looks interesting as topline growth has continued, albeit margins have taken a beating here.
- While current and modest losses are no major concern given the strength of the balance sheet, margin expansion is needed to create appeal here.
In the spring of 2021 I believed that Inari Medical ( NARI ) saw continued performance, calling it a great success story from the IPO which took place a year earlier.
Liking the business a great deal, I wished I paid up for the shares at the time of the offering, but I no longer was willing to commit capital in May 2021, as shares have seen a decent really.
Creating Some Perspective
Inari Medical went public in 2020 in what has been a big success for the medical device company which focuses on the development of products in order to improve the lives of people which suffer from venous diseases. At the time, the company marketed two minimally invasive catheter-based thrombectomy devices, with the clot-removing therapy having seen great commercial traction since its debut in 2018. This came as the therapy showed greater effectiveness compared to drugs and other therapies.
Sales came in at $7 million in its debut year, with revenues increasing to $51 million in 2019 and revenues coming in at nearly $27 million in the first quarter of 2020, as reported at the time of the IPO.
With 47 million shares valued at $19 per share, the $900 million equity valuation looked quite compelling as the business showed rapid growth, was posting sales at a run rate in excess of a hundred million, and operated with a pro forma net cash position around $150 million.
Moreover, the business was solidly profitable, as these circumstances made that shares doubled to $43 on the first day of trading, boosting the operating asset valuation to $1.8 billion. After second quarter sales came in flattish on a sequential basis, third quarter sales rose to nearly $39 million, as shares rose to the $70s. As the business posted fourth quarter revenues in excess of $48 million, this propelled shares higher to the $80s.
With shares trading at $120 in May 2021, I found the valuation very high, as the 55 million shares represented a $6.6 billion equity valuation, including a $164 million net cash position. With a $6.4 billion operating asset valuation, the company traded at 33 times sales as the company guided for first quarter sales around $55 million and full year revenues at $230 million. This resulted in sky high valuations, even as the guidance felt a bit conservative.
The Dust Settles
After shares traded at $120 more than two years ago, shares ended 2021 around $90 per share, traded in their $60s late in 2022, as shares now trade at $58 per share, near the lowest levels seen since the public offering.
Early in 2022, the company posted 2021 revenues of $277 million, essentially doubling from the year before, with revenues coming in way ahead of the conservative guidance. Solid operating earnings of $18 million in 2020 narrowed to $10 million and change, mostly as R&D expenses nearly tripled to $51 million.
The company only provided a revenue guidance for 2022 (and no margin guidance), with sales seen between $350 and $360 million. Despite a strong net cash position the company elected to sell 2 million shares at $81 per share in March 2022, strengthening the balance sheet further.
This guidance again was on the soft side as 2022 revenues rose to $383.5 million, as fourth quarter revenues comfortably topped the $100 million mark. That was about the good news as the company posted an operating loss of $28 million for the year, something which cannot be attributed to higher R&D expenses. That said, the company guided for continued growth with sales for 2023 seen up to $470-$480 million. Even with fourth quarter revenues reported at $107.7 million the company continued to post an operating loss of $5.9 million.
In May the company posted first quarter sales of $116.2 million, up a solid 34% on the year before as operating losses were flattish around $5.3 million, although that R&D expenses ticked up to $22 million for the quarter. With a share count of 55 million shares trading at $58, the company commands a $3.2 billion equity valuation, which includes a $328 million net cash position which implies that operating asset valuation have fallen to $2.9 billion here.
As the company hiked the midpoint of the full year sales guidance to $483 million, the company trades at nearly 6 times sales which looks reasonable given the topline growth, but margins are simply not there to create earnings here.
What Now?
The reality is that after runaway growth and early profits soon after the IPO, valuations have settled quite a bit. Sky-high sales multiples have normalized quite a bit here, as topline sales trends remained quite good. That is about the good news as the company has failed to retain profitability, for the wrong reasons as R&D intensity has not really grown, although that cash holdings do not make it an imminent concern.
The real concern is that of the competitive situation and the need for the business to be profitable in order to sustain this valuation and sustain a competitive advantage in the marketplace, which is a big if. The company is still in hyper growth mode and has launched a lot of new products in recent times. This is not showing up in higher R&D expenses, but more so commercial expenses related to product launches, which hopefully means that margin expansion is seen over time, at least that is the promise.
Believing that this could be a 15-20% operating margin business over time, pre-tax profits of $75-$100 million on the current revenue base could result in about $1.00-$1.35 per share in earnings power. Given the still strong topline sales growth, this starts to provide some support to the valuation at levels not too distant from here.
Given all this, I am still upbeat on the long term prospects of Inari, yet am cautious of the valuation, which makes me a buyer of shares if they test the $50 mark, preferably fall to the $40s.
For further details see:
Inari Medical: Approaching Interesting Levels