Why ShockWave Medical Keeps Rising

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About: ShockWave Medical, Inc. (SWAV)
by: StockBaller
Summary

Strong earnings and reasonably healthy financials represent a reasonably solid investment.

ShockWave Medical has significant room for growth in the markets its three products target.

While the company was founded 10 years ago, only recently has it received CE and FDA approval, with major revenue growth since then.

ShockWave Medical (SWAV) is a medical device company mainly specialising in using its intravascular lithotripsy (IVL) technology to treat calcified plaque (a strong predictor of heart attacks), first coming out with an initial public offering in early March at an opening price of $17 per share. Since then, SWAV has undergone a number of positive developments, and has sky-rocketed in price in the space of barely over a couple of months:

SWAV offers three main products:

Below I'll take a look at SWAV's potential for growth via tapping more into the markets it operates in and gaining market share from competitors, the main reasons for its huge move upwards in the past couple of months (mainly strong earnings) and its valuation.

Market Size

According to the National Institutes of Health, the global PAD device market size (relevant to ShockWave's M5 and S4 products above) is estimated at around $2.9 billion and is expected to grow around 3% annually due to an increasingly aging population and higher rates of diabetes (others also have strong estimates, such as Allied Market Research which predicted the PAD market to garner $4.9 billion by 2023); SWAV estimates its IVL system to treat PAD to have an addressable market opportunity of over $1.7 billion. Meanwhile, the global device market in coronary intervention for CAD (relevant to ShockWave's C2 product) is estimated to be almost $10 billion according to Millennium Research Group; in this case, SWAV estimates a market opportunity of over $2 billion. And in addition to its three already-established products, SWAV also mentioned in its Form S-1 that it is developing an IVL catheter that can treat patients with Aortic Stenosis (AS) - if successful, it is estimated that this also represents an addressable market of an additional $3 billion.

Room For Growth

I believe there is significant room for SWAV to rise further over the long term. The fact remains that although SWAV was founded 10 years ago, it is an extremely new company in the sense that it has only recently (as of last year) gained either CE or FDA approval for any of its three products, and thus has a short history of selling to US or EU markets - and in that very short history it has already seen major growth as seen in its Q1 2019 earnings (below). Those strong earnings are coming at a stage where SWAV is still yet to put all its products into the market, including its ShockWave C2 (still awaiting FDA approval), or its IVL catheter to treat AS.

Competition and Risks

Naturally, there remains a major amount of competition in the markets SWAV operates in, much of it from companies larger or more established than SWAV that also provide lithotripsy devices or are also involved in treating PAD or CAD in other ways. These include the following:

Beyond the threat of existing competitors, there are various other risks facing SWAV, not least of all the fact that it has limited selling experience. It is only since last year that the company has properly began commercializing its M5 and C2 products, and although earnings (see below) have been strong for the last quarter, a limited selling history makes it difficult to accurately forecast sales figures in future. That is in addition to the difficulties and uncertainties in getting products to market in the first place, both in terms of R&D spending and the uncertainty of CE and FDA approvals. And should SWAV endure a negative cash flow for an extended period of time while trying to bring more products to market, there is a risk of financial difficulties in future.

Q1 Earnings and Financials

On May 8 SWAV reported on its first quarter 2019 results, with revenue of $7.3 million representing a 450% increase over the first quarter of 2018 (primarily driven by increased sales of the M5 in the US and international markets), along with a gross profit of $4.2 million compared to only $528,0000 for the first quarter of 2018. While net loss expanded ($12.8 million versus $9.6 million), that is primarily due to higher operating expenses related to commercial expansion and spending on clinical programs. SWAV predicted revenue for the full year of 2019 to range from $33 million to $36 million, representing 169% to 194% growth over the prior year.

After raising $100 million from its initial public offering and SWAV's first quarter of 2019, its most recent Form 10-Q lists $138 million in cash and cash equivalents, which in addition to available borrowings, should not put the company at major risk within the following 12 months in spite of its negative cash flow from operations.

Outlook

With strong revenue growth in Q1 2019, a huge market potential and solid enough financials for the company to continue operating for at least the foreseeable future, I believe one can reasonably consider SWAV as a speculative investment. However, for those interested in SWAV, it may be advisable to wait for at least a minor pullback. At the time of writing SWAV currently trades around $65, a huge increase from the high $40s it was trading at on the morning of May 9 after it released earnings, given that no news has taken place since then.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.