TransMedics (NASDAQ:TMDX) is an innovative biotechnology company that may well have the potential to disrupt the $11 billion organ transplant industry.
The company’s unique organ care system technology protects and monitors donor organs before they are transplanted into patients, resulting in improved organ health and outcomes. TransMedics also provides logistical services, including organ transportation through its fleet of 18 aircraft.
Despite the company’s seemingly huge potential in a market ripe for technological innovation, TransMedics stock has all but fallen off a cliff in recent weeks. In the past month alone, TMDX has sold off by 36.4%.
What is responsible for this drastic pullback, and is TransMedics now a buy while shares remain depressed?
Why Has TransMedics Sold Off?
The simple reasoning behind TransMedics’ retreat is that its Q3 earnings report was less positive than analysts were originally expecting. The company delivered $108.8 million in revenue for the quarter, coming in short of the $115 million analysts were forecasting.
Earnings per share also missed significantly. Analysts had projected $0.29 in earnings per share for the quarter, but TransMedics was only able to deliver $0.12.
The market, already somewhat skeptical of the company’s valuation going into the quarterly earnings report, sold off drastically as a result.
Speaking of TransMedics’ valuation, it’s worth noting that the stock was priced at a level that implied extremely high growth. At the end of Q2, the stock was trading at about $150 per share despite delivering trailing 12-month net earnings of just $0.04 per share.
At the same time, TransMedics was priced at over 13.5x sales. By almost every definition, TMDX was overvalued to a degree that invited selloffs at the first sign of trouble.
TransMedics’ Performance and Growth Potential
Despite the Q3 report triggering a sudden drop in share prices, the company’s fundamentals did improve significantly during the quarter.
Revenue was up 64% over the year-ago period, while operating expenses fell from $69.0 million a year ago to $56.9 million.
Even with disappointing earnings results, it’s worth considering that the company generated $4.2 million in net income in Q3 compared to a net loss of $25.4 million just 12 months earlier.
TransMedics has also turned in some fairly impressive growth on a longer-term basis. In 2019, the company’s full-year revenues totaled just $24 million. For the 12 months ending in Q3, that number has now risen to over $400 million. For 2024, the company still expects full-year revenues of $425 million to $445 million.
Debt, however, is a bit of a concern for TransMedics. The company’s debt-to-equity ratio is currently 2.4x. While net long-term debt totals only $59.3 million, TransMedics also carries nearly $450 million in senior convertible notes on the liability side of its balance sheet.
The company’s current ratio, however, is a rather high 8.2 that provides it ample buffer room when it comes to meeting its near-term obligations. As of the end of Q3, TransMedics’ reserve of cash and cash equivalents totaled $330 million.
The company still seems to have a very long growth runway ahead of it. By 2028, TransMedics hopes to be participating in 10,000 or more transplant cases each year.
The revenue expectations the company has set for this year would result in a year-over-year gain of about 75-85%, and it’s very likely that revenues will keep rising at attractive rates throughout most of the rest of the decade.
How Does TMDX’s Valuation Look Now?
Even with a solid selloff under its belt, TransMedics stock doesn’t appear to be priced at anything near bargain levels.
TMDX is still priced at over 600x cash flow, 80x forward earnings and 7x sales. As a result, investors who buy in today are still paying a very premium price that could easily retreat more if future quarters bring more disappointing results.
It is, however, worth acknowledging that analysts remain bullish on TransMedics. Even though the stock’s price target has been significantly downgraded by several analysts, the lowest standing forecast for the stock is $87 per share.
In light of where shares are currently trading, the most bearish view on TMDX appears not to anticipate any downside. Indeed, the median price target of $125 per share would still imply TransMedics having more than 45% upside potential over the coming year.
Is TMDX Stock a Buy or Sell?
With revenues rising by over 16 times in just five years and net profitability now achieved, TMDX stock is a strong buy.
TransMedics appears to be a company that will have exceptional growth potential, and the performance it has already turned in is certainly difficult to disregard.
The problem for value investors is that the stock still looks extremely expensive. The market has already shown its willingness to correct the price of TMDX shares when even very positive results fall short of expectations.
The multiples that TransMedics trades at still imply extremely high growth levels and may leave the stock open to subsequent selloffs.
To illustrate this view, it’s useful to consider the fact that TMDX shares are still up by nearly 50 percent on a 12-month basis even after the recent retreat. The company has, of course, come a very long way in the last year. However, the stock reached such heights that it could well remain overpriced.
Another problem for TMDX shareholders is the ongoing dilution of shares due to stock-based compensation. In Q3 alone, the company reported $7.6 million in stock-based compensation expenses. This contributed to a 9.1% increase in the number of outstanding shares on a year-over-year basis. Since the end of 2022 alone, the number of TMDX shares has increased from 30 million to 36 million.
At the end of the day, TransMedics appears to be an excellent company whose stock is still likely flying too high to make it a practical investment. If shares continue to pull back, though, TMDX could reach a point where its valuation is more reasonable. Between the strong remaining possibility of overvaluation and a habit of diluting shares, though, TransMedics may be a better stock to hold than to buy at the moment.