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Outset Medical Looks Like A Good Short Ahead Of IPO Unlock

Mar. 09, 2021 1:34 PM ETOutset Medical, Inc. (OM)AFRM, DASH, FMS, SNOW22 Comments
Fishtown Capital profile picture
Fishtown Capital


  • Outset Medical's IPO unlock happens on 3/15, where 27.3 million more shares become available for sale, roughly twice the current float.
  • Revenue expectations for the Q4 quarter may be too high and could show negative sequential growth.
  • Despite a reasonable $35 million/year run rate, gross margin is still deeply in the red at -41%.
  • Snowflake and Affirm have been weak since their unlock dates, and the same may happen to Outset.

Outset Medical (NASDAQ:OM) is a medical device maker that produces a novel dialysis machine called the Tablo Hemodialysis System.

Tablo is more compact than many other dialysis machines and includes water purification integration. It's not a new product; it was approved back in 2015 as a 510k device. In March 2020, the FDA approved its use for in-home dialysis, which has generated a lot of excitement around the stock.

Bull Case

As straightforward as it gets - treating Chronic Kidney Disease (CKD) and End Stage Renal Disease (ESRD) is a massive market. According to U. of Michigan total spending exceeded $120 billion in 2017 alone. Creating a compelling technology and grabbing even a small share of the market could be extremely lucrative.

Bear Case

Aside from the usual concerns around profitability and valuation which I'll cover below, they're not the only player in the space, and many of the competitors are larger and better capitalized.

For example, CVS launched a clinical trial for Hemocare, an at home dialysis machine in July 2019. Meanwhile, Fresenius Medical Care (FMS) purchased NxStage Medical for $2 billion in cash several years ago for their home dialysis device.

Another piece of the bear case is that Outset is selling Tablo at a negative gross margin. I believe the current $35-40 million/year run rate should be sufficient scale to generate some gross profit, but they're not even close, losing 41% on each sale. I wonder if they're only growing because the price is unsustainably low.

IPO Valuation and Pricing

Outset Medical had a lot of interest in their IPO. Originally slated to sell 7.6 million shares at $22-24, it sold an upsized offering of 10.3 million shares for $27/share.

From the Q3 10-Q

On September 15th, the first day of trading, shares opened above $50 and finished above $60. Currently trading

This article was written by

Fishtown Capital profile picture
Individual investor and family office principal with over 20 years of investment experience. I favor fundamental analysis and look for individual issues and asset classes that are out of favor and represent a good risk/reward trade off. I often employ options strategies, covered calls on companies I own that have gotten ahead of themselves, and writing puts on stocks that I'd like to own at lower prices.Educational background Finance MBA (NYU Stern) with Computer Science undergraduate.

Analyst’s Disclosure: I am/we are short OM. 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.

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