TransMedics Group (TMDX -2.52%) was a top-performing stock that more than doubled in value during the months between the end of 2023 and late August.
Unfortunately, shares of the healthcare stock have collapsed more than 60% from their previous peak. The stock had already been beaten down this year, but management recently incited another round of losses by announcing a new chief accountant and lowering its revenue guidance range.
Recent announcements might not bode well for TransMedics, but its proprietary organ care system (OCS) has been generating tremendous sales growth. In the first half of 2024, total revenue rocketed about 125% higher year over year. Let's look at what's gone wrong to see if this stock could be a bargain buy on the dip.
Why TransMedics stock was beaten severely
On Dec. 2, TransMedics said the revenue guidance it had already lowered on Oct. 28 was no longer valid; management lowered the midpoint of its revenue guidance range to $430 million from $435 million. The difference was minor, but the stock fell hard.
The small guidance reduction had an outsized impact on the stock because American businesses rarely need to walk back revenue guidance in between the quarterly reports they issue every three months. Reminding investors that its growth rate is rapidly decelerating as the CFO departs probably should make investors nervous.
TransMedics has attracted some downgrades from sell-side analysts who have noticed intensifying competition for transplant organ preservation services. For example, OrganOx is a privately held British company that markets a similar device called Metra. In late 2021, the OrganOx Metra system earned approval from the U.S. Food and Drug Administration (FDA) to transport livers.
OrganOx is a privately held company that doesn't have to report sales, but we know that liver transplants are responsible for 70% of TransMedics Group's total revenue.
In 2023, TransMedics acquired an aviation company, its fleet of jets, and a lot of maintenance expenses. If it's passing those expenses on to transplant centers that don't appreciate the extra service, they'll beat a path to OrganOx's door.
Paragonix is another organ transport and preservation business that could apply more pressure on TransMedics' growth rate. In 2023, the Massachusetts company reported just $43 million in sales -- but this September it was acquired by Getinge, an international healthcare giant with over 12,000 employees.
Not a bargain
Shares of TransMedics have been beaten way down, but I wouldn't say they're in bargain territory. The stock is still trading for 71 times trailing-12-month earnings, or 5.9 times trailing-12-month sales. This rich valuation is only appropriate for businesses you can expect to grow at a double-digit percentage for many years.
I recently trimmed my TransMedics position because intensifying competition has slowed sales growth to a trickle, but the stock is still richly valued. Management's new guidance range implies $110 million in revenue during the fourth quarter, which is only slightly more than the $109 million it reported in the third quarter.
But I didn't close my position, because the results from the OCS DCD Heart trial could give TransMedics a durable advantage and allow for many years of steady growth. In the study, hearts donated after cardiac death (DCD) and maintained with a TransMedics OCS led to significantly improved survival odds compared to cold-stored hearts that were donated after brain death (DBD). This is a big deal, because most surgeons won't touch cold-stored DCD hearts.
Paragonix's SherpaPak produces similar results with DCD hearts but keeps them at a lower temperature. As a warmer device, the TransMedics OCS can carry hearts longer distances than the SherpaPak, which makes it easier to find a matched recipient.
Intensifying competition might slow TransMedics Group's growth rate. Still, I expect it to continue growing, albeit at a much slower rate than investors have gotten used to over the past couple of years.
