In February 2021, the FDA approved ShockWave Medical, Inc.'s (NASDAQ:SWAV) novel Shockwave Intravascular Lithotripsy (IVL) System with the Shockwave C2 Coronary Intravascular Lithotripsy (IVL) Catheter. It is not important to understand the device and how it is used, but it is important to see huge revenue growth thanks to sales of this product here in 2022.
Earnings from May 2022 highlighted the innovative new product, with 190%+ revenue growth. This is the fifth 100% or more YoY growth quarter for SWAV, bringing quarterly revenues up to $93.6 million. Also, guidance has been raised for 2022, and the company expects $435 to $455 million in revenues, up from $405 to $425 (and far above analyst expectations of $408 million). As the main kicker for this investment, the company also offers net income positivity, with quarterly net income reaching $14.5 million.
ShockWave has set out to target a relatively unstudied area of cardiovascular disease, coronary artery calcification. The disease causes the coronary artery to become too stiff, and when adverse events occur, such as a heart attack, even prevents treatment of issues. Balloons inserted into the artery fail to have the strength to remove or force open the calcium blockages, and a new mode of attack is needed. Considering that cardiovascular disease continues to rise, even though we know how to prevent it (diet & exercise), there is a large market for ShockWave to address.
Coronary artery calcification was previously thought to be a benign process, and the calcified lesion increases in accordance with aging. Subsequently, studies determined that medial calcification is associated with arterial stiffness, which increases risk for adverse cardiovascular events. Further studies showed that the extent of coronary artery calcification (CAC) strongly correlated with the degree of atherosclerosis and the rate of future cardiac events,, and the high prevalence of CAC in coronary heart disease (CHD) patients makes percutaneous coronary intervention (PCI) difficult to perform…Currently, there is no specific medical therapy targeting the reduction of CAC, and whether the treatment strategy limits the progression or enhances the regression of CAC or has prognostic impact needs further clinical studies.
To combat the issue, the company uses vibration, sound or "shock" waves, to disrupt the tissue and remove calcification. The non-invasive treatment uses commonly used catheter technology to insert into the artery, and then uses a small balloon to target risk areas with the vibrations. As an FDA approved medical device, it has better performance, efficacy, and safety than other available treatments. One reason for this is that vibrations, or lithotripsy, have been used in humans before as a way to treat kidney stones.
While the main use case will be in the coronary arteries, other areas of the body are also targetable. I expect the company to expand indications slowly over the years as they improve the tech. This is similar to how Edwards has been innovating Transcatheter aortic valve replacements since the early 2000s. While the device is far safer and effective than other treatments, the company has brought their pricing to competitive levels to drive utilization. Considering the population size and number of procedures estimated to be performed, the company has a goal for a $8.5 billion total addressable market (TAM). Current quarterly revenues are a 10th of this, and I find the market to be quite conservative here in the early stages.
The May earnings report was extremely positive, with the company beating expectations and maintaining huge growth. In fact, the quarterly revenues are far above even 2020 full year revenues. While there is not a history of performance to fall back on with ShockWave, the current upward trend is favorable. Further, profitability is great for the early-stage position of the company even as innovation continues. This allows net income to be positive thanks to a lower proportion of selling & marketing and R&D expenses (a great sign). There are many companies out there that have to waste tremendous amounts of cash just to drive revenues. It seems this is not an issue at the moment.
While it is great to see revenues surging forward at the speed of sound, it is important to remember that this is an early development company. While the current surge of orders is great, a slowdown will occur soon as revenues normalize. Where the equilibrium state ends up is unknown, and I will not try to guess. It will also be important to watch margins as the revenues fall, and this current honeymoon phase subsides. There will be a chance that expenses begin to catch back up and the company loses FCF positivity. While I don't believe this will happen thanks to the competitive advantage, weakness will damage the company valuation. It also seems that the company has plenty of cash for the moment, and that dilution has minimized, but again, this may be an issue in the future. However, for the moment, it is all systems go.
The last main issue to consider for the company is valuation. While the current Price to Sales ratio of 20x is far better than in the previous year, it will come down without a doubt. I find that a high growth phase equilibrium P/S will be around 10x. This is because growth peers such as Edwards Lifesciences Corporation (EW) and Intuitive Surgical (ISRG) trade at 11-13x, even with close to $100 billion market caps (ShockWave is currently at $5 billion). Considering the 20% jump in price on earnings release day, investors feel fairly confident that growth will outpace the decline in valuation. I am sure in 10-20 years the current share price will be quickly left behind, regardless of inflation, recession, or other noise.
All-in-all, ShockWave's earnings out-performance caught my attention again, as I had considered the company after their FDA approval last year. Now that the revenues are quickly leaving analysts and investors in the dust while the market is in turmoil, it may be the time to add to the position. I will slowly develop a position moving forward, and I am getting selling my small 10x Genomics (TXG) position to do so (sold most of it last Fall). Similar investment ideologies, but ShockWave has a better growth rate to valuation proposition currently (TXG has ~50% revenue growth at a 10.5x P/S).
I enjoy the profits and growth that SWAV provides, and I expect the company to reach a position similar to Edwards in the coming decades. While SWAV will need to expand revenue sources, they have the initial catalyst that will aid in driving innovation. I will just be watching those expenses closely.
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Disclosure: I/we have a beneficial long position in the shares of SWAV, EW either through stock ownership, options, or other derivatives. 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.