Is TransMedics' Stock Valuable for Purchase at a 52% Reduction?
From January 2024 till August 23, TransMedics' (TMDX -2.45%) stock soared an impressive 123% — however, the good times didn't last. A disappointing third-quarter earnings report triggered a selloff, driving the shares down by 51.5% from their peak by lunchtime on November 7.
Hospitals and transplant centers have increasingly relied on TransMedics' innovative organ care system (OCS). Is the recent market downturn an opportunity to snag a high-growth stock at a deep discount? Let's delve deeper into why shares dropped and where TransMedics is headed moving forward.
Why did TransMedics shares plummet?
On October 28, TransMedics unveiled third-quarter revenue that increased a substantial 64% year-over-year to $108.8 million. However, this figure fell short of analyst expectations by $6.2 million and was $5.5 million lower compared to the second quarter.
Earnings also failed to meet the mark. Wall Street was anticipating earnings of $0.29 per share, but TransMedics delivered just $0.12 per share – a disappointing figure that nearly went unnoticed when management tried to reassure investors by reiterating their previous guidance.
TransMedics' revenue and profits started to surge in late 2021 following FDA approval of its OCS to preserve and transport hearts post-brain death (DBD). The luminescent growth projections fueled the stock price to sky-high valuations.
The slide in the stock isn't due to fears of business failure, but rather because investors have revised their growth expectations slightly.
Bullish Wall Street
Despite lowering their price targets, majority of analysts still maintain a bullish stance on TransMedics. Oppenheimer reduced its target to $125, suggesting a potential 45% upswing from current prices.
TransMedics is the sole company with an FDA-approved OCS that enables warm-perfusion of organs like hearts, lungs, and livers with blood, enabling longer distance transportation. The technology also significantly expands the heart donor pool.
In April 2022, the FDA approved TransMedics OCS for use with hearts donated after circulatory death (DCD). Previously, the majority of DCD hearts were disposed of. Thanks to OCS, DCD hearts are now valued as highly as those preserved the traditional way.
In the OCS DCD heart trial, patients receiving a DCD heart preserved with TransMedics OCS were significantly more likely to survive without complications than those with DBD hearts stored on ice.
TransMedics' OCS makes it feasible to transport organs over longer distances, thereby increasing the likelihood of finding a suitable match. In 2023, TransMedics acquired a fleet of jets to eliminate charter flights, ultimately lowering delivery expenses. As the sole organic OCS and jet operator, TransMedics doesn't necessarily need to cut costs for its clients.
TransMedics invested in a new aviation maintenance hub in Dallas during the third quarter. While earnings saw a decline in the third quarter, they may surge in 2025 as many planned aviation-related investments have already been settled.
TransMedics CEO, Waleed Hassanein, attributed the sequential revenue decline in the third quarter to normal variability. The decrease in liver and heart transplant volumes nationwide from the second quarter to the third quarter was by 5%.
Is it a good buy now?
TransMedics stock is selling at a discount of about half its previous peak, but it's not exactly cheap. On November 7, it traded at 89 times earnings expectations.
TransMedics remains expensive, but it's capable of delivering fast-paced growth to justify its rich valuation. With total revenue forecasted to climb 76% to 84% this year, TransMedics could surge in 2025 as it presents more clinical evidence regarding its OCS, reportedly delivering better results than traditional storage methods.
Investing in TransMedics shares involves inherent risks due to its lofty valuation, but with a high risk tolerance, adding some shares to a diversified portfolio at a discounted price could be a smart move.
Given the recent market downturn of TransMedics, some investors might consider this an opportunity to invest in the high-growth company at a reduced price. With a bullish stance from most analysts, such as Oppenheimer reducing its target to $125, indicating a potential 45% upswing, investing in TransMedics shares could be seen as a strategic move for those with a high risk tolerance. However, it's important to note that TransMedics remains expensive, trading at 89 times earnings expectations, so any investment decision should carefully consider the company's growth potential and risk profile.
