Is TransMedics Group Stock a Buy?

TransMedics Group (TMDX -2.52%) has emerged as a medical devices industry leader, capturing strong growth and climbing profitability from its organ transplant delivery system. Since the company's 2019 initial public offering, the stock has returned a massive 285%.

That said, the early success hasn't been achieved without some stumbling blocks. The company's latest quarterly update came in below Wall Street estimates, and shares are down 49% from their 52-week high at the time of writing. The good news for TransMedics investors is that several factors still support a positive outlook, despite the volatility in the stock.

Is now the time to add TransMedics Group stock to your portfolio? Here's what you need to know.

Transforming organ transplantations

One of the many challenges with organ transplantation as a life-saving procedure is that many viable donor organs often go unused, given the time-sensitive logistical constraints. TransMedics Group has developed the only medical device approved by the U.S. Food & Drug Administration (FDA) for heart, lung, and liver transplantation in the United States that extends the organ preservation time.

Unlike traditional cold storage methods where human tissue is simply stored on ice, the TransMedics organ care system (OCS) keeps the donor organ in a human-like metabolically active state, thereby increasing the chances of a successful operation. The company's business model is strengthened by a dedicated fleet of 18 company-owned aircraft within a national OCS network capable of expediting the transporting of organs to patients in need.

Image source: Getty Images.

The trends have been impressive. Compared to 1,000 transplants performed using the OCS in 2022, TransMedics managed to more than double its volume to 2,300 in 2023, with continued momentum this year. The company has also reaffirmed a target of achieving 10,000 OCS transplant cases annually in the U.S. by 2028.

More importantly, TransMedics is capturing a greater share of all U.S. heart and liver transplants, suggesting its system is becoming the industry standard while growing the total national transplant volumes. The aspect of TransMedics building an economic moat in the specialized medical niche is a big part of the attraction of the stock as an investment.

A mixed Q3 update

In the third quarter, TransMedics reported a 64% year-over-year increase in revenue, driven by climbing OCS utilization. Earnings per share (EPS) of $0.12 reversed a loss of $0.78 in the prior-year quarter.

On the other hand, those headline metrics disappointed expectations, with the market looking for even stronger growth and a higher EPS. Notably, the $108.8 million in quarterly revenue represented a sequential decline compared to $114.3 million in the second quarter, which was affected by weaker national transplant donor availability along with some routine aircraft maintenance.

Management's comments during the earnings conference call projected optimism in the outlook while suggesting TransMedics' competitive positioning is as strong as ever. The company plans to move forward with its next generation of OCS technology while seeking reimbursement coverage in Europe as part of an international expansion.

TransMedics is reaffirming its full-year guidance for revenue growth between 76% and 84% compared to 2023. According to consensus estimates, 2024 EPS is forecast to reach $1.07, marking a major improvement compared to a negative $0.77 last year. For 2025, the market sees EPS reaching $1.65, highlighting the path to more consistent profitability.

Data source: Yahoo Finance estimates. YOY = year over year.

To buy or not to buy TransMedics shares

There's a lot to like about TransMedics benefiting from several tailwinds to keep growing and consolidate its market share. On the other hand, investors might face sticker shock. Shares of TransMedics are trading at 85 times estimated 2024 earnings -- and 55 times next year's EPS forecast. In my view, that valuation premium and earnings multiple is justified given the company's industry leadership and solid fundamentals, including its accelerating earnings.

Ultimately, the ability of TransMedics to execute its strategy and get back on track with stronger growth over the next few quarters could be a catalyst for the shares to rebound. For investors who are confident that the company is still in the early stages of a significant long-term opportunity, I believe the stock is a good buy today within a diversified portfolio.