Low prices often translate to low quality. That's true for lots of products. It's also applicable to stocks.
However, there are exceptions. Some stocks have low share prices but excellent long-term prospects. One example stands out and could be the best growth stock under $20 on the market right now.
A surprising choice?
The stock I have in mind is Outset Medical (OM -5.79%). Shares of the hemodialysis-system maker currently trade at a little below $18. To some, Outset might be a surprising choice for best growth stock under $20.
Why would selecting Outset perhaps be a surprise? The stock hasn't actually delivered growth thus far. Since its initial public offering in September 2020, Outset's shares have plunged close to 70%. The healthcare stock is down around 30% in 2023 alone.
Some of this decline can be chalked up to a dismal overall environment that began last year for growth stocks. Outset also had its own unique troubles. For example, in June 2022, the company had to hold shipments of its Tablo hemodialysis system for home use while the U.S. Food and Drug Administration reviewed a regulatory application for changes to the device. Although that hold lasted for less than two months, it caused Outset's shares to plunge.
The sell-off in recent months appears to be due primarily to Outset's guidance for full-year 2023. Outset projects its revenue will increase between 22% and 30%, but many investors were hoping for even stronger growth.
Outset's massive opportunity
Most of Outset's success so far has come from sales of its Tablo system in the acute care market. The company has been highly successful, by the way. In 2022, it ranked No. 33 on Deloitte Technology's Fast 500 list of North America's fastest-growing companies, thanks to its revenue growth of around 5,000% between 2018 and 2021.
Acute care remains a key growth area for Outset, with a $2.5 billion addressable market. However, that pales in comparison to the U.S. home dialysis market, estimated to be $8.9 billion and growing.
Relatively few patients have opted for home dialysis in the past, in part because of the technological drawbacks of previous devices. Outset's Tablo, though, is a game-changer. It eliminates the need for multiple dialysate bags for each treatment, cuts out the associated prep time, requires fewer treatments each week, and is much easier to learn than older machines.
Reimbursement guidelines have also been a historical barrier limiting the adoption of home dialysis. But that is changing as well with new Medicare incentives in place.
Risks, razors, and blades
To be sure, Outset Medical stock comes with more risk than some investors can tolerate. The company could take longer than expected to build up its home dialysis market share. Outset also remains unprofitable, increasing the risk that it could have to raise capital in the future through dilution-causing stock offerings.
However, I think Outset will eventually turn a tidy profit. On a recent Motley Fool Money podcast, Jason Moder highlighted one key reason, from my perspective, that profitability seems likely -- Outset's razor-and-blades business model.
The company makes money on the initial sale of Tablo systems. Over time, though, it generates even greater revenue from consumables and services such as maintenance and training. As the install base for Tablo grows, Outset's recurring revenue will also increase significantly. And as its recurring revenue grows, the company should be able to cover its fixed costs. That's a great way to become profitable.
Outset Medical's market cap currently stands at a little under $900 million. If the company can capture just 10% of its total addressable market, it could be worth more than 5x its current valuation using the average price-to-sales ratio for the healthcare products sector.
I predict that Outset will capture an even higher market share than 10% over the next decade. It truly could be the best growth stock under $20 on the market right now.
