Another weekend, another “you want to jump on this immediately on Monday morning!” email from the Motley Fool. Thankfully, this isn’t a microcap name they’re teasing, and they’re promoting a high-cost service, which means there won’t be 10,000 people rushing to buy today… so there’s probably no reason to rush, and we can take a moment to think it over.
But first, of course, we have to identify which stock it is they’re talking about.
The ad came in starting on Saturday, and the part that caught our readers’ attention was that ’85X potential’ bit, naturally enough. So what’s the spiel?
They’re selling subscriptions to one of their “Extreme Opportunities” services, which are focused portfolios designed for a particular trend — this one is called Augmented Reality and Beyond, so I assume that this is an updated name for the Motley Fool Extreme Opportunities: AR service that they started pitching back in 2019. They’re currently charging $1,499, nonrefundable.
This service was talked up under Eric Bleeker’s name a couple years ago, but the headliner today is Jason Moser, whose name I don’t think I’ve come across before. This is what the ad says…
“I’m so excited to share that earlier this morning, my good friend Jason Moser released a stock recommendation to members of Extreme Opportunities: Augmented Reality and Beyond that has never before been recommended by any service at The Motley Fool.”
And then we get to the best part, the clues they drop about this new recommendation — here’s the section where they throw in our hints:
“There’s lots to be excited about this stock….
“Small and underfollowed (with a market cap less than 1/150th the size of Amazon), but we think it has simply incredible upside potential….
“This stock’s first VR foray targets a growing niche experts believe could be worth $46 billion — 85x the company’s annual revenue….
“Multiple paths to massive growth. In addition to the huge VR opportunity, the company estimates that they still have between 80% and 90% of market share to seize in their core markets – so, plenty more opportunity to unlock. I love companies with multiple pathways to grow, because when they fire on all cylinders they can drive simply incredible results.”
If the clues are at all accurate, then these are the numbers we’re dealing with — they say this stock is “less than 1/150th the size of Amazon,” and “size” would generally mean “market capitalization” to the Motley Fool. So that means the market cap is somewhere in the $0-$10 billion range — probably between $8-10 billion, since they could have said “less than 1/200th” under $8 billion. It’s hard for me to call $10 billion “small,” but I guess everything is relative.
And we’re told that the “growing niche” that has something to do with virtual reality could be worth $46 billion… and that this would be 85X the company’s annual revenue. Assuming they mean the company’s current annual revenue, that would mean revenues as of now are in the neighborhood of $500 million, I’ll give it a pretty broad range of $450-550 million.
And the Fool says they “have between 80-90% of market share” to still be seized in their core markets. And that it has not been recommended by the Motley Fool before.
So what are we dealing with here? The best match for those criteria (sector/AR focus, market cap and revenue) is Penumbra (PEN), which is a $9.4 billion company today with trailing revenue of $539 million over the past four quarters. It’s a medical device company, primarily known for various catheter-related products for treating strokes and blood clots, and it is not yet a virtual reality stock, not in any real way (none of that $539 million in revenue is from virtual reality products)… but they do have a new virtual reality product that’s starting to gather some steam, and they intend to build it into a major line fo business. It’s also a stock that as of last month, at least, was not a Motley Fool recommendation, per their disclosures.
And the stock is also a “battleground stock” between shorts and longs, for those who are excited about “high short ratio” stocks — it went public about five years ago and has had two points in its relatively short life when the stock had a short ratio above 20%, both back in mid-2019, when it was being criticized by short sellers as a one-trick pony that was losing market share (Spruce Point’s report from July, 2019 sums up that short case), and more recently, just a couple months ago, when they got hit with fraud/dangerous product allegations from another short seller (mostly Quintessential Capital Management, positing that their scientific research was authored by a fake person, which Penumbra refuted), which was a really odd exchange… but it also requires some thought from investors, because there was actually a safety concern with one of Penumbra’s new products, and that resulted in a voluntary recall of that product just a week or two later.
I don’t know anything about Quintessential Capital Management, but they also did get Marc Cohodes on board with a short attack on Penumbra before this recall, focused mostly on the “dangerous product” allegation, and he’s certainly not infallible but I’d never enjoy being on the other side of one of his trades. He’s a bulldog. I don’t know if he’s still short, or if the recall and the impact on the stock price was his objective, and I actually don’t even know if his short/fraud allegations went beyond that one product which was recalled.
The company primarily sells a variety of systems and parts for vascular and neurological procedures, with stroke treatment the single leading product area but some meaningful growth in their various clot-removal devices. It was one of those devices, their latest Jet 7 Extra Flex catheters, that they recalled. If the Motley Fool is pitching this as a Virtual Reality play, it’s because of their REAL system, which is primarily being used right now for rehab for stroke victims but has, they believe, substantially more potential.
Their core business area of catheters and clot removal is a very competitive field, they did create some strong market share in niche areas through innovating new products, and they still see themselves as being nimble innovators — they think their advantage, to at least some degree, is faster innovation and an established pattern of rapid product development to improve care — some of it has been new product breakthroughs, some gradual improvement on existing products.
And as far as that bit about having a lot of market share yet to take, that’s a squishier clue but we do have a match there as well — this is a quote from the CEO’s comments at the JP Morgan Healthcare conference last month:
“We have come a long way already, but we have a long, long way to go. We still have 80% of the patients suffering from ischemic stroke to help. Over 90% of the vascular thrombectomy patients to help. And almost 100% of the patients that can be helped with our virtual reality technology.”
And he also noted that they think they can reach $1 billion in revenue by 2023… which would be almost 100% growth from last year.
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The shares have leapt back from those recall lows in December thanks largely to the strong fourth quarter revenue that they pre-announced a few weeks ago. There is a ~$10 million or so impact from the late-December recall, but they expect to hit revenue growth of 2-3% for 2020. That is obviously not what folks look for in growth stocks, but is pretty impressive given the huge impact that COVID-19 had on companies who make and sell non-pandemic medical products (and, of course, on sales forces and on manufacturing facilities).
So if revenue continues at the fourth quarter rate, the annual run rate would be about $690 million right now. Analyst estimates for the year are $650 million — there’s still a lot of uncertainty about COVID-19, and they’ve said that they’re not sure if they can provide guidance yet on the next call (which should be in about three weeks), they just don’t have much visibility into what the healthcare market will be while we work through hopefully just a few more months of severe COVID impact.
So if we go by those estimates, that would mean investors at $255 or so are paying a little under 14X estimated 2021 revenue… and it is widely expected that they will return to profit in 2021. They earned 98 cents per share in adjusted earnings in 2019, probably lost a little money in 2020, and analysts think they’ll be back at 73 cents in 2021 and $1.42 in 2022.
Those estimates are still probably significantly impacted by COVID, since nobody wants to really go out on a limb and make bold estimates about a return to where they were (at the beginning of 2020, before the pandemic, analysts were forecasting $1.25 in earnings per share for 2020), and the recall of one of their products in December is likely reason for analysts to add a little more caution to their outlook, despite the strong revenue “beat” in the fourth quarter last year. Their latest products have seemingly put to bed the “one trick pony” arguments from 2019 and the assertion that they would be losing market share, particularly given the nice bounceback in the fourth quarter… but as to whether there’s anything systemic or shady in the company to worry about, per Cohodes and QCM, or there was just a problem with one product that will soon be forgotten, I have no idea.
The Virtual Reality connection is interesting, and it is a priority for them, but there’s no real sense from the company about how long it will be before that has an impact on the income statement. That REAL business was launched to provide therapeutic treatment for stroke patients and perhaps also other kinds of therapies, with a headset and control tablet and a suite of therapeutic software, but they say more detail is coming later this year about their larger goals and vision for that in the future as they launch the product more aggressively… including the ability to do remote therapy and pre-loaded therapeutic exercises when the therapist is not in the room. It’s not a meaningful part of their revenue picture right now, so if you’re buying for that you’ll have to be patient, but it is fair to say that they’re focused on the VR therapy system as their third major business (joining the neuro and vascular businesses), so clearly they see it as a possible long-term growth platform. Whether that works or not, I dunno.
So there you have it… a Motley Fool “Augmented Reality and More” idea that is being pitched as a hot buy… if the Thinkolator is right on this one, the Fool recommendation could explain why the shares popped immediately at the open today, briefly hitting $275 right as the trading calendar turned to February, so perhaps that’s a bit of further confirmation if you want that. The stock now sits right where it was a week ago, though it had a wild week (up 20%+, then gave it all back), so perhaps it has also just been getting some Reddit-type attention as a possible short squeeze candidate, as are a few dozen other stocks to a limited degree.
And whether or not the Fool likes the stock is not really the point, of course — it’s your money, so the question is whether or not it’s a company you want to own. It’s been a rollercoaster in the past couple months, for sure, and my first impression is mostly just a combination of concern about the recall and whether or not Marc Cohodes is still aggressively short this stock, and a fairly high level of being impressed with the company at the JP Morgan conference, and thinking that analysts are probably being a bit too pessimistic with their outlook given the fourth quarter growth they reported. I don’t own this one, and it’s a long way from being a Virtual Reality powerhouse, but if you’ve got a perspective to share about it either way, well, feel free to let it loose with a comment below. Thanks for reading!