908 Devices - Mass Spectrometry, Not For The Masses

Summary

• 908 Devices has seen a soft first quarter as a publicly traded company.
• This quarter was accompanied by a softer guidance for 2021 as well, despite a big army contract.
• I like the long-term opportunity, yet am a bit cautious given the moderate operational performance.
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908 Devices (NASDAQ:MASS) attracted my interest late in 2020 when the company went public. I devoted a small article to the company at the time of the IPO in an article called ''a very interesting offering'', although I tempered expectations a bit after a 150% return in its first day of trading.

Back To December

908 is a purpose-built handheld mass spectrometry device producer. The company uses its own technology to put the analytical power required in such mass spectrometry devices in smaller and more accessible devices, taking them outside the laboratory into the field where they actually are used.

Mass spectrometry devices are used for quick and actionable answers in a wide range of applications such as life science research, yet also applications related to bioprocessing, forensic and other applications. The quicker and greater employment of such devices has many benefits, essentially expanding the range of potential usage cases as well.

Since its initial MX908 product was launched in 2017, it has sold 1,200 devices to some 300 customers in a wide range of industries like pharmaceuticals as well as academic settings. The company claims a significant factor in improvements in terms of speed, size and costs versus its traditional competitors, which is at the heart of the adoption and sales of these devices.

Furthermore, the company markets the Rebel, a smaller desktop analyzer. Since its launch in 2019 just 31 units were sold, yet this is a higher end applications which is used within fixed (laboratory) settings, unlike the MX908 which is active in the field.

Valuation Discussion

The company did end up going public at $20 per share in December, as the sale of 6.25 million shares allowed it to raise $125 million in gross proceeds. With a share count of 26 million shares and a flat net cash position, I pegged the enterprise valuation at around $1.2 billion with shares rising 150% on their first day of trading to $50 per share.

That $1.2 billion valuation is quite a sum for a business which generated $22.1 million in sales in 2018 on which it furthermore reported an operating loss of $6.4 million. Moreover, revenue factually fell in 2019 to $18.0 million, with losses more or less doubling, indicating part of the lumpiness of the business.

Trends turned for the good in 2020. Revenue for the first three quarters of the year rose 120% to $21.2 million, with operating losses narrowing significantly to $1.9 million at the same time. MX908 placements rose from 100 to 280 over the nine-month period of time, with Rebel sales totaling 18 units. At the same time, it is the law of small numbers which makes the sales numbers quite lumpy. First quarter sales of $4.0 million rose spectacularly to $11.1 million in the second quarter, to fall back to $6.0 million in the third quarter.

I believed that the company typically posts a strong fourth quarter, as in fact I saw potential for fourth quarter sales (speculating at the time) at $10 million, for an annual number of $31 million. That worked down to a 37 times annualized sales multiple, anything but cheap. Amidst those observations, I was left in doubt as the valuations were sky-high, yet so was growth. At the same time, the fundamental qualities of the product are evident and the potential addressable market is huge.

The Fourth Quarter Numbers

Since the public offering shares have seen quite a bit of volatility with shares having traded in a range between $40 and $80 over the past three months, riding the momentum waves on financial markets here. Unfortunately, the fourth quarter numbers were soft, with sales down 32% to $5.7 million as this resulted in slightly higher operating losses as well.

Following the lumpy and soft final quarter, full year sales rose 50% to $26.9 million. Using a diluted share count of 26 million shares, which still trade around $50, as the enterprise valuation of $1.2 billion remains intact, which means that the company actually trades around 44 times 2020 sales!

The company issued a guidance calling for sales between $38 and $40 million in 2021 which implies 41-49% upside, although it comes after a seasonally softer fourth quarter, with the company trading at 31 times anticipated sales this year. While these numbers are not great, it is comforting to hear the company announcing a $25 million multi-year purchase order from the US army as well.

In fact, it seems that the contract applies to 2 years, as an annual revenue contribution of $12.5 million is very significant if we compare this to the current revenue base. A bit of a negative is that this has already been factored into the 2021 revenue guidance which, furthermore, is weighted towards the back half of the year. This suggests no quick sequential increase in sales in the current quarter.

Fortunately, the company continues to sound upbeat on the opportunity as a current addressable market estimated at $5 billion might grow into a $22 billion market in the coming five years. While the long term potential remains very good, I must say that I am a little disappointed with the fourth quarter numbers, but, moreover, with the 2021 guidance, certainly as it already factored in some contribution from the army contract.

Final Conclusion

Given the disappointment in the numbers and outlook, I am turning a bit more cautious here. Having initiated a small position in the mid-forties amidst recent weakness, I am surprised to see quite a recovery in recent days to levels in the mid-fifties. Given this recovery amidst some fundamental weakness, although the long term opportunity remains good, I am perhaps taking some modest chips off the table here.

Analyst’s Disclosure: I am/we are long MASS. 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.

Long a small position.