Transmedics Valuation, Pros, and Cons

I have owned Transmedics stock for about a year now during which time the price has been stuck in the $70-80 range despite the company posting 150%+ YoY growth for the last 7 quarters (one exception being when it briefly dipped below $40 on the news that they were going to purchase their own airplanes). It is starting to get a bit frustrating and I’m wondering if the market knows something I don’t.

So I want to do a quick valuation exercise as a sanity check of my expectations.

The following are goals stated by Transmedics management, which I assume reasonable and achievable, and I have no reason to doubt them based on their performance thus far:

  • 2300 transplants in 2023, aiming for 10K by 2028
  • 30% EBIT business by end-2025 (expect to hold for 2028 as well) as per Nov 2023 Piper Sandler Conference

If we assume there’s a linear relationship between the number of transplants and revenue, then we would expect 10000/2300 = 4.35x growth, i.e. Revenue of $241.6M in 2023 becomes $1051M in 2028.

The share growth over the last 11 quarters has varied greatly, so let’s take the average of 2.1% per quarter and extrapolate that for 51.8M shares.

30% EBIT on $1051M would be $315M. Divide by 51.8M to get $6.09 EPS. Apply a PE of 25 gives us a share price of $152 in 5 years, for a CAGR of 12.8%.

What’s the risk of not achieving this CAGR? We could see some government interference or regulation put a damper on growth, or legitimate competition put pressure on the 30% EBIT goal, but I don’t really see it. Transmedics already has their foot in the door with a majority of transplant centres. The business case is a win/win/win (patients, transplant centres, Transmedics) and the technology aligns well with recent government changes to organ allocation rules. The technology provides a very wide moat against competition. And I can’t say enough good things about the management team. I actually enjoy listening to the earnings calls, something I’ve never said for any company.

On the upside, management’s typical sandbagging quite possibly means they will reach their targets sooner. If we assume the 10K goal is reached in 3.5 years instead of 5, the same calculations yield a CAGR of 23%.

Since I’m looking for growth companies with potential to 2x in 3 years, or a CAGR of around 26%, this upside looks sufficient.

Long TMDX 13%.

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I am seeing the recent price of TransMedics as extremely compelling considering they gave what I would consider to be a blow out earnings report. They had projected 222-230M revenue for the full year, or with one quarter remaining and achieved 241M, which is 11M above the high end of their range. Additionally, the street had forecast EPS of -0.03, and it came in at 0.12

They are saying on the call that the aviation business margins are well ahead of any internal forecasts they had. Revenue was up 22% sequentially, and 159% year over year.

Meanwhile the stock price was $90 on February 16, and is at $83 currently.

There is a trend I am noticing with small cap companies recently, where strong growth and results is not translating to corresponding stock price increases as one may expect. I believe this is a result of 2021 where there were a ton of zombie SPACs that collapsed. Because there were near 100% losses in many of the companies, I suspect analysts have shied away from looking at these names or recommending them to investors.

Eventually though if the fundamentals keep improving quarter over quarter like with TransMedics, the price of the stock will rise. It may take some time for the market to catch up but I believe this company could become a multi bagger from current levels fairly quickly. Some recent examples of companies like this are Super Micro which was previously at 5B a year ago and is now at 50B market cap. Or Sound Hound which was a 500M company earlier this month and is now at 1.5B

There’s a number of other small cap growth names which I am seeing this phenomena of looking mispriced, and a lot of potential opportunities to get some solid growing companies like TransMedics at a reasonable price.

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And that nicely summarizes why I am no longer an owner of this company. I held a position for a while, but I came to the realization that the static stock price kept my money tied up unproductively while many opportunities were available with rising stock price.

I don’t evaluate an investment opportunity based on the stock price, but I don’t ignore it either. IMO, if TMDX breaks to the upside there will be ample time to sell something and redirect the funds to TMDX. I just don’t like keeping money on the sidelines waiting for the market to realize it should be blowing up a company that’s not getting any love.

After all, the point of being an investor is to make money. We make money by purchasing stock in a company at a lower price than it is likely to be at a later point in time. I fully admit, that’s not always a simple proposition, but right now it’s easier than it has been in quite a while to buy stock in really good companies with a rising stock price.

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Seems a bit too conservative (their estimates usually are), because think about how much of a slowdown that would be for their revenue. Here’s a reasonable (I think) future that isn’t close to 1051m in 2028:

2021: 30m
2022: 93m (209% growth)
2023: 242m (159% growth)
2024: 484m (100% growth)
2025: 774m (60% growth)
2026: 1084m (40% growth)
2027: 1409m (30% growth)
2028: 1691m (20% growth)

So it’s very, very tough to estimate several years out. I don’t know what’s reasonable, but I would expect that 10,000 organs by 2028 is just an easy round number they’re throwing out to show what’s achievable, but certainly isn’t the top limit of what’s possible if things go their way. And with my I-think-not-impossible numbers above they could get to over $1b revenue by 2026, not 2028. So looking more than a year or two out is probably useless, and of course we can’t even know about the next couple years. But every quarter of ~100% growth or better makes it more likely they blow away the lower numbers in future years and more likely the future will look like my aggressive numbers above – or even better!

That said, for me, a 13% position wouldn’t work. I think there are substantial unknowns and risks, and I agree with you, it’s not cheap. It deserves to be up in the past year, because they’ve performed exceptionally. But that’s the problem – they were too expensive a year ago. They seem pretty fairly valued to me now. But they’re still a small company with ~240m in revenue and a 2.8b mkt cap. That’s not cheap in any world.

Among other risks, they’ve been attacked by a member of the US Congress. Here’s their response: https://investors.transmedics.com/static-files/efba44b7-1826-495f-9787-7805424f00f5

I like the stock. But they’re far from a sure thing.

Bear

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I love this company and what they are doing. It was once my largest holding by a large margin. But there are risks.

  • If COVID (or something similar) resurfaces, it would severely damage TMDX. COVID really hurt them. I’m not saying I think this is likely, but you have to think about it.

  • Possible alternative treatments - like using genetically modified organs from pigs for transplants. This is not likely in the next 5 years, and it might never happen, but it is a possibility. Genetically modified pigs could provide unlimited organs for human transplants : Shots - Health News : NPR

  • Competition - I think the TMDX service network gives them a big moat, but competition could eventually chip away small regional chunks of volume from TMDX. Competition could also cause TMDX to have to reduce their pricing - which is pretty high.

  • AI and self driving cars could reduce traffic fatalities and thereby reduce the number of organs available for transplant. TMDX growth is limited by the number of viable organs available. If less people die in a manner that makes their organs available, then TMDX growth is limited.

I still own shares, and I still think the company has the POTENTIAL to be a great investment, but I personally would not put over 10% in it.

Disclaimer - my largest individual stock investment is about 3%, so I’m biased on this topic.

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And it was $36.74 on October 30.

At some point we need to remember investing is primarily about the business and not the stock. While @brittlerock’s “static stock price” might be technically accurate depending on your end points, TMDX has been ridiculously volatile in between. Those Oct/Nov lows were into the Q3 report when everyone (including me) was holding their breath about whether or not the aviation buy was a good move. Six months later it not only looks like a good move, but a great and potentially dominant one. There have been plenty of chances to add between $40 and $90. For those who have, I doubt “static” is the right adjective for their current returns.

Yes, getting Congress’s attention can be unsettling. Here’s the initial letter from Rep. Paul Gosar along with the response @PaulWBryant posted earlier:

https://investors.transmedics.com/static-files/efba44b7-1826-495f-9787-7805424f00f5

While I always prefer kudos to scorn, how many companies have we seen get negative attention from Congress only to keep doing their thing? There are never any guarantees, but TransMedics certainly seems to have had no problem laying out a slew of facts suggesting that contrary to Gosar’s take it doesn’t hinder outcomes but actually improves them. Not to mention the fact TMDX has been actively involved since last August when the government realized the need to revamp the US’s organ transplant network in the first place (Senate sends organ transplant bill to Biden's desk - Roll Call). Regardless, TMDX’s point-by-point response to Gosar is extremely thorough and very much reflects the company’s obvious expertise in this area.

I know TMDX is not SaaS, but I’ve always been partial to disruptive hypergrowth companies in the historically strong part of their S-curve (usually $100M to $1B or so in revenue), especially as those companies are swinging to the positive cash flows and profits which ultimately prove their business model. TMDX fits that bill perfectly, and I have no reason not to stick with it while performing at this level.

To each his or her own, but I see getting the chance to add a tick more at $80 after touching $90+ this week as a long-term opportunity.

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@stocknovice I stand (sit actually) corrected. I held a position in this company a while back, but when they announced that they were going into the air freight business I bailed and really haven’t paid close attention since. To be honest, I’ve really not followed TMDX very closely so my comment about static stock price was based on occasional observations over a period of time.

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what’s up with their guidance? Their most recent quarterly revenue was 81M and they guided to 360-370M revenue for 2024. Thats a bit more than 5% q/o/q growth in the next 4 quarters. Thats a heck of a slowdown from the 159% growth in 2023. In bear’s table he showed revenue in 2024 at 484M by comparison (100% annual growth rate).

I believe in sandbagging some but that seems like it is more than sandbagging.

Any thoughts around this?

Thanks,
Rob

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In Q4 2021 they initially guided to 62-82% growth for 2022. They delivered 208%

In Q4 2022 they initially guided to 48-55% growth for 2023. They delivered 159%

Now in Q4 2023 they guided to 49-53% growth for 2024.

They clearly guide ultra conservatively. I’m expecting significantly higher than their guide.

-wsm

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