April 14, 2021 concludes the 180-day lockup period of Eargo, Inc. (NASDAQ:EAR)
When the lockup period ends for Eargo, its pre-IPO shareholders will have the opportunity to sell their 28+ million outstanding shares, which they could not do during the six month lockup period. This is significantly more than the 7.185 million shares offered in the IPO. The potential for a sudden increase in stock flooding into the secondary market may negatively impact the share price of Eargo.
Currently, Eargo trades in the $52 to $54 range, significantly higher than its IPO price of $18.
Eargo hopes to disrupt the market for traditional hearing aids with its Eargo hearing solution. Their product is nearly invisible by being completely in-canal. And, its solution has rechargeable batteries, which is different from conventional hearing aids.
The company uses a B2C approach, which further differentiates their product. Most traditional hearing aids are sold through third-parties such as hearing clinics. As of June 2020, Eargo had sold over 42,000 hearing aid systems. The company believes it has the capability to deepen their market penetration significantly across the approximately 43 million American adults with hearing loss. The company notes that approximately 465 million people worldwide have measurable hearing loss.
Currently, Eargo targets consumers with annual incomes that exceed the median household average. They estimate that includes 14 million American adults with a target market value of more than $30 billion in 2019. Still, the company points to estimates that only around 27% of American adults with hearing loss seek hearing aids, typically because of difficulties using them and the stigma attached. Eargo believes its product overcomes these obstacles. In its SEC filing, Eargo pointed to the following features that differentiate its system from other hearing aids on the market:
Aid is suspended in the ear canal for performance and comfort
Batteries are rechargeable
Their system offers multiple sound profiles for better personalization
Accessibility through easy-to-use purchasing interface
Eargo plans to pursue international expansion through multiple marketing channels to expand its penetration. The company is headquartered in San Jose, California and has approximately 185 employees. Eargo was formerly incorporated under the name Aria Innovations, Inc.
Eargo reported the following financial highlights for the 4th quarter of 2020:
Net revenue reached $22.4 million versus $10.6 million year-over-year
Gross profit was $15.8 million versus $5.9 million year-over-year
Gross margin grew to 70.6% versus 55.2% for the same period in 2019
Operating expenses reached $25.7 million representing 115.0% of net revenue, versus $18.8 million representing 176.9% of net revenues year-over-year
S&M expenses reached 15.5 million versus $11.0 million the prior year
R&D expenses reached $4.2 million versus $4.1 million the prior year
G&A expenses totalled $6.1 million versus $3.7 million in the same period last year
Net loss was $(11.8) million representing $(0.39) per share
CEO and President Christian Gormsen has served in his position since June 2016. He has served on the board of directors since November 2014. His previous experience comes from senior positions at EMEA, GN Group, and McKinsey & Company. He earned an M.S. in business administration and economics from the Copenhagen Business School.
COO William Brownie has served in his position since April 2019. He previously served as Chief Customs Officer and Chief Financial Officer for Eargo. His prior experience comes from consulting with a wide array of businesses. From 2012 to 2015, he served as a Managing Director.
While Eargo seeks to differentiate itself in a saturated market, it does face considerable competition from manufacturers of conventional hearing aids. These companies include League Sound, Sinova, Sivantos, Starkey, Demant, GN, Widex, Signia, Rexton, Phonak, Hansaton, Unitron, Oticon, and Bernafon.
The underwriters priced the IPO at $18 per share. The stock closed on its first day of trading at $33.68. The price rose to $71.83 on February 8. The price has declined since then to reach $43.80 on March 29. The stock currently trades around $51 to $52.
When EAR's IPO lockup expires next Wednesday, millions of previously-restricted shares will be eligible for trading. We believe that the pre-IPO shareholders and insiders that own these shares will be eager to sell since EAR has a nearly 200% return from IPO. Aggressive, risk-tolerant investors should consider shorting shares Monday, Tuesday or early in Wednesday's session. Interested investors should cover shares during the Thursday and Friday sessions (April 15 and April 16 2021).
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Disclosure: I am/we are short EAR. 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.