I am neutral on Vapotherm (VAPO), as its attractive stock price and high potential pipeline make it look attractive. However, the company has a lot of risk stemming from its declining revenues and widening losses.
Vapotherm is a publicly held corporation that manufactures advanced respiratory technology for ventilator support.
The company is known for developing the first non-invasive, humidified high-velocity therapy nasal cannula system for patients suffering from respiratory distress, who cannot tolerate breathing masks.
Vapotherm recently announced it has received 510(k) clearance from the FDA for its innovative next-generation system, the HVT 2.0. This particular system is designed to provide high flow therapy using an integrated air source.
The technology is expected to be released during the fourth quarter of 2021, and appears to be quite promising, since about 50% of hospital beds in the US do not have wall air. When used with a source of oxygen, HVT 2.0 will provide breathing support to patients in both hospitals and home settings.
Vapotherm reported revenue of $20.6 million for the second quarter of 2021, which shows a decrease of 41% year-over-year. Adjusted EBITDA was a loss of $12.3 million for the second quarter of 2021, compared to a loss of $4.3 million for the same quarter of the previous year. The loss was primarily due to lower COVID-related demand for equipment, leading to a reduction in revenue on a year-over-year basis.
The company also reported that it would expand its disposable equipment production capacity by increasing assembly lines in Mexico, resulting in a 75% increase in capacity. This will diversify Vapotherm’s manufacturing base, and is expected to improve the company’s gross margin in the coming months.
For Fiscal Year 2021, Vapotherm is now expecting revenue of $85 to $90 million, higher than the previously expected revenue, which was estimated to be between $82 million and $88 million.
Vapotherm stock does not look too expensive when considering the EV/Revenue ratio of 7.1x. However, the company is not profitable, and is burning cash, which makes any valuation estimate quite speculative.
Furthermore, revenues are expected to decline in 2021 and 2022, while losses are also forecasted to widen. As a result, it is hard to make a clear case that the stock is undervalued at the moment.
Wall Street’s Take
From Wall Street analysts, Vapotherm earns a Strong Buy analyst consensus, based on three unanimous Buy ratings in the past three months. Additionally, the average VAPO price target of $40.67 puts the upside potential at 47%.
Summary and Conclusions
Vapotherm looks like an interesting speculative opportunity at the moment. On the one hand, the stock has decent upside potential. On the other hand, the stock is incredibly risky at the moment, burning cash at a rapid rate, and is not profitable yet.
In fact, its revenues are expected to decline slightly, and losses are expected to widen over the next year and a half.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
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