Experiencing a 50% decline following a notable setback, this robust investment opportunity now seems attractive for potential purchase.
TransMedics (TMDX, up by 1.93%) is thrusting itself to the forefront of transforming the organ transplant procedure. Thanks to its Organ Care System (OCS), TransMedics' equipment effectively keeps donated livers, hearts, and lungs active during transport, mimicking their natural functions.
Empowered by this groundbreaking capability, TransMedics' OCS has found significant traction in U.S. transplant centers, as evidenced by a staggering 1,300% surge in revenue within the past three years.
Having acquired shares more than a year ago, I was well aware of the exhilarating growth trajectory that TransMedics would undeniably provide, and it certainly lived up to expectations, skyrocketing nearly 300% in value within the first year of my investment. However, a subsequent 50% dive left me barely breaking even.
In spite of these rollercoaster stock price movements, TransMedics has emerged as a more promising investment opportunity, in my view, throughout this past year of volatility. While the company's third-quarter earnings fell short of expectations, I put forth the following three reasons that make TransMedics an excellent candidate for long-term growth stock investment.
Reshaping the organ transplant industry
Despite a 30% nighttime plunge in TransMedics’ stock price following the release of its 64% year-over-year sales growth, the company found itself at the top of my dollar-cost averaging shortlist for the following reasons.
1. Swelling market presence in a critical market segment
Leveraging traditional cold-storage processes during the organ donation process pales in comparison to TransMedics’ National Organ Care System Program, helping the company expand its market share considerably over the last few years.
In 2022, the U.S. witnessed approximately 16,000 heart, liver, and lung donations, with TransMedics accounting for around 1,000, giving it a 6% market share. Fast-forward two years, and management projects TransMedics could perform approximately 3,750 transplants in 2024 – a triple-digit increase in market share to roughly 20%.
The spectacular growth in the organ transplant industry, which has grown by an average of 4% annually since 2010, coupled with TransMedics’ expanding market share, presents an attractive long-term growth outlook for the company. Furthermore, the streamlined operations offered by services like TransMedics’ equipment and expanding logistical network have catalyzed a surge in organ donations, with heart and liver donations rising by 12% in 2023.
Though liver and heart transplants in the U.S. declined by 5% and 3% respectively between the second and third quarters of 2023, TransMedics’ U.S. revenue fell just 3% sequentially. This downturn in revenue, while disappointing, does not justify sounding the alarm, given that the company managed to maintain its market share during this 90-day period. In fact, this sluggish growth could present a long-term investment opportunity for stakeholders, considering management’s renewed commitment to reaching its 10,000 transplants objective by 2028.
2. Profitability attained in the growth phase
Despite continuing on a hypergrowth trajectory and allocating significant resources towards 18 aircraft and a new Texas command center for its logistics network in the past year, TransMedics has posted impressive earnings. Flipping from relying on third-party fleets to implementing its own logistics network, the company has proven that in-house logistics can yield substantial cost savings.
Maintaining a consistent 8% net profit margin over the last year, and generating positive cash flow from operations over the last three out of four quarters, TransMedics is an uncommon investment that offers both high growth and early profitability.
While this is not a direct comparison, I'd propose that TransMedics’ profitability potential could parallely mirror Intuitive Surgical’s growth trajectory in the long term. Although they operate in different healthcare sectors, their business approaches, which mainly generate revenue through equipment, accessories, and services, may share some similarities. Intuitive Surgical's impressive 29% net profit margin serves as an aspirational goal for TransMedics.
3. Potential for a reasonable valuation (over the long term)
According to two possible scenarios for TransMedics,
- If TransMedics falls short of its 10,000 annual transplant goal in 2028 and only reaches around 8,000, it would generate around double its current revenue by that time (approximately $800 million). Assuming a net profit margin of 15% – which is still quite achievable, considering it was at 12% just two quarters ago – the company would trade at an estimated 23 times its future earnings.
- On the other hand, should TransMedics reach its objective of 10,000 annual transplants in 2028 and a net profit margin of 20%, it would be valued at around 14 times its 2028 earnings potential, despite including some aggressive assumptions. This example, nevertheless, illuminates the potential value hidden within TransMedics’ shares if it meets its targets.
Most importantly, this assessment disregards the aspect that TransMedics is just starting to penetrate international markets, which coincidentally handles about double the number of transplants compared to the U.S. Besides, the company leadership has hinted at the possibility of venturing into extra organs besides the three they currently support, along with broadening the range of medical conditions where their Organ Care System (OCS) can be employed through participating in fresh clinical trials.
In essence, investors should refrain from overdramatizing the latest 90-day insights regarding TransMedics' operations. Rather, they should concentrate on the coming twenty-odd years - and it could be prudent to systematically invest in this high-growth stock at the present, less daunting valuation.
Given the current market trends and TransMedics' growth potential, it would be wise to consider reinvesting any excess money in this high-growth company. With a potential triple-digit increase in market share by 2024, TransMedics presents an excellent opportunity for long-term growth investing.
Moreover, TransMedics' ability to maintain profitability while expanding its operations underlines its financial strength and prudent management. As a result, it could be a promising addition to any well-diversified investment portfolio that emphasizes growth and long-term financial gains.
