With sales growing at 50%-60%, Myomo Inc. (MYO) trades at 1x forward sales. I don’t believe that the undervaluation of the stock is justified. In addition, the company’s medical device could be very beneficial for COVID-19 patients suffering from stroke. In my view, sales could increase even more if COVID-19 cases increase. At 2x sales, which I consider a conservative target, I foresee 50% stock returns.
Founded in 2004, Myomo Inc. develops myoelectric orthotics for patients with neuromuscular disorders. The company’s flagship product, called MyoPro, was approved by the FDA. The research carried out at Harvard and MIT indicated that the company’s devices include brain signal systems, EMG sensors, and movement sensors. Veterans, students, stroke survivors and many other type of patients benefit from the device:
I like two very interesting features of MYO. Firstly, the company works directly with insurance companies. Hence, the probability of getting paid is very high. As shown in the slide below, commercial payers like Cigna, the US Department of Veterans Affairs, and Medicare accept the device:
In addition, I appreciate quite a bit the massive market opportunity of the company’s devices. We are talking about close to $10 billion in the United States, and $20 billion outside the U.S. Given the current revenue figures and the target, there is significant room for improvement. In my opinion, as MYO markets its other products like the Exoskeletons or Prosthetics systems, sales will most likely pick up.
No Concentration Of Clients
While assessing medical device companies, in my opinion, understanding the amount of clients is key. If the company has a few clients, there is a significant risk of losing revenue. It is worth mentioning that it is not the case with MYO. In 2019, the client concentration risk was very low:
For the year ended December 31, 2019, there were no customers which accounted for more than 10% of revenues. For the year ended December 31, 2018, two customers accounted for approximately 25% of revenues, excluding grant income, which includes 13% from a related party. The Company sells its product to an orthotics and prosthetics practice whose ownership includes an individual who is both a shareholder employee and executive officer of the company. Source: 10-k
Manufacturing Is Done In The United States
Another great point about MYO is the location of the manufacturing process. Unlike many medical device companies, MYO’s suppliers are mostly in the United States. The company does not report risks from supplier located in China or somewhere outside the United States:
Manufacturing for the electromechanical kit is provided by our supplier Cogmedix, a wholly owned subsidiary of Coughlin Companies in Worcester, MA. The second element is the custom fabrication of the orthosis itself from a model of the patient’s arm. Custom fabrication is provided by GRE, privately owned by Jonathan Naft, an executive of Myomo. Source: 10-k
50%-60% Sales Growth
Growth investors will, in my opinion, appreciate the company’s sales growth. From 2016 to 2019, MYO exhibited more than 50% sales growth y/y. Given the massive market opportunity targeted, I don’t know why sales growth would decline. If the company continues to invest in online marketing, I don’t see why sales growth would stop.
MYO does not report positive CFO, so most value investors will not be interested in the company’s business model. In H1 2020, net cash used in operating activities was worth -$6 million. In the same period in 2019, the company reported approximately the same figure. The company is valuable because of its sales growth, not because of its profitability.
Very Stable Balance Sheet and Increasing Share Count
In my view, most investors will appreciate MYO’s financial stability. As of June 30, 2020, with 3.6 million shares outstanding, the company’s cash per share is equal to $2.9, more than 50% of the market price. That’s not all. More than 80% of the total amount of assets is represented by cash. In my opinion, the balance sheet looks like that of a company prepared for launching a large commercial campaign. It has a decent amount of cash to pay for online marketing in order to increase sales.
I am not worried about the total amount of liabilities. The company’s current amount of cash is larger than MYO’s liabilities of $2.7 million. Besides, MYO’s financial debt is very small, equal to $0.9 million.
The table of contractual obligations doesn’t pose any problem. MYO shows a total of only $0.1 million in minimum royalty payments. Given the current amount of cash, most investors will not really care about contractual obligations:
The company finances its balance sheet through the sale of equity. Thus, investors will need to monitor MYO’s share count. In 2020, MYO increased its shares outstanding from less than 0.8 million shares to 3.6 million shares. As a result, the intrinsic valuation of the equity declined.
Like most emerging businesses, MYO also sold convertible securities like warrants and convertible debt. The company is not doing anything that other large companies have not done. However, shareholders need to understand that they may suffer dilution risk if holders exercise the convertible securities. As shown in the last quarterly report, the company saw warrants being exercised. Besides, it issued equity to repay debt.
Current Valuation: 1x Sales Represents An Opportunity
With a stock price at $4.6 and 3.6 shares outstanding, the market capitalization is $16 million. If we take into account net debt of -$9.8 million, the enterprise value is $6.2 million. In 2019, revenue was equal to $3.8 million, and sales growth was 50%-60%. If we assume sales of $6 million in 2020, MYO’s EV/Sales value would be equal to approximately 1x. In my view, taking into account the revenue growth, 1x forward sales is very interesting.
I am not much worried about the future sales performance of MYO because the company is not worried. MYO uses telehealth video conferences for selling its devices, so the COVID-19 does not create much trouble.
There is an additional advantage that MYO has not mentioned in its presentations. I researched the consequences of COVID-19 infection. Among different issues created by the virus, there is the risk of strokes, among others. The company’s devices are used by patients, who suffered a stroke. Hence, I would assume that sales could increase if COVID-19 cases increase:
According to the scientific research, approximately 85% of stroke survivors report certain extremity impairment. That’s not all. Researchers noticed that MYO’s device enhances kinematic performance not only with the device. Patients report better performance without the device after 16 training sessions. I don’t think that the market understood MYO’s business potential. If the COVID-19 affects a significant number of people and stroke cases increase, MYO may sell a significant amount of units.
According to the most recent IR presentation, MYO expects to receive a significant amount of money from Medicare claims in 2H 2020. Also, notice that the company officially became a medicare provider in 2H 2020. As a result, the market pushed up the share price, which makes a lot of sense.
As noted by MYO’s CCO, from now on, the company will be able to obtain funds from many more insurance companies. Market participants understood very well the new information and pushed the share price accordingly:
“This certification is very important to Myomo. Not only does it allow us to bill Medicare directly in the future, it also opens the door to applying for in-network contracted coverage from many private commercial insurance companies as well as state Medicaid plans.” Source: Micah Mitchell, Myomo’s Chief Commercial Officer
Risks: Small Company And Low Liquidity
In my view, the largest risk for shareholders comes from equity dilution. As mentioned below, the company has a significant amount of convertible securities. If the holders of these securities decide to convert them, the share count would increase. Fine business model can become unprofitable for shareholders because of equity dilution. Shareholders need to understand this risk:
We have a significant number of securities convertible into, or allowing the purchase of, our common stock. Investors could be subject to increased dilution upon the conversion or exercise of these securities. For example, as of December 31, 2019, we had 181,176 shares issuable upon the exercise of warrants, with a weighted-average exercise price of $86.40 per share, and 21,805 shares issuable upon the exercise of stock options under our equity incentive plans, with a weighted-average exercise price of $63.00 per share. Source: 10-k
The valuation of the company may continue that low because it is a small company. As a result, there is a liquidity issue that shareholders need to understand well. There is not a lot of stock demand, which pushes the price of the stock down. If the amount of investors and liquidity is low, I would expect the share price to continue at undervalued levels.
Myomo grows its sales at a significant pace, so trading at 1x forward sales is not justified. Besides, MYO’s medical device could be very beneficial for COVID-19 patients suffering from stroke. I don’t think that many traders did notice this stock catalyst, which explains why the share price is at the current mark. With sales growth of 50%-60%, the company could trade at 2x-3x sales, or $6-$8. With this in mind, I would be buying shares and waiting for a double digit percentage increase.
Disclosure: We don’t hold Myomo shares.