April 27, 2023

The market has been a little soft this week as better-than-feared results from many large caps, including Microsoft (MSFT) and Facebook (META), have been somewhat overshadowed by renewed fears of banking turmoil. Thanks First Republic (FRC). That stock is down 96% from its 2023 high (and that wasn’t a particularly high price).

Under the surface we’re starting to hear more grumblings about tighter credit. This is what the Fed has wanted, so it’s not a big surprise. But it’s showing up in unpredictable ways. One example has been a move among small biotech companies to preserve cash by cutting back on spending.

Given all this the FOMC rate decision next Wednesday (May 3) is going to be of significant consequence to the market.

It’s not just about the expected 25bps hike (77% probability of that happening) but what Fed Chair Jerome Powell says about the Fed’s future plans. It seems ludicrous that the Fed wouldn’t signal it’s ready to pause.

Inflation is coming down and the full effects of this rate hike program haven’t been fully felt yet. Just like when the Fed kept rates low for too long there’s a very real risk that they’ve hiked too fast and will have to backtrack before inflation has a chance to get back to the target of 2%.

The market is expecting a pause in June (63% probability). But we’ll just have to see.

Moving on, earnings season gets intense for us next week. We also have a new Issue slated for release on Thursday, May 4.

It’s going to be interesting!

Recent Changes: None

Updates

Alphatec (ATEC) has pulled back a little as the market digests the $60 million stock offering (under 5% shareholder dilution) which will fund the REMI Robotic Navigation System acquisition, which I detailed last week. The acquired platform brings deep navigation and robotics to spine procedures using a 3D image scan or a 2D fluoroscopic image of the patient. This is the direction the industry is headed and Alphatec is playing offense as defends its territory from larger competitors Medtronic (MDT), Globus (GMED) and Stryker (SYK).

More specifically, REMI is currently used to place screws in the posterior lumbar region (L1-S1), which makes it compatible with Accelus implants. Alphatec will be working on 510K clearance ahead of a planned full launch in 2025 when REMI will be integrated into the InVictus Posterior Fixation system. It will also have free-hand navigation at that time. The technology is expected to be as accurate as Medtronic’s Mazor X, cost less (about $500K), and be an attractive addition to hospitals. Gross margin on REMI should be around 70%, consistent with the company average.

Alphatec also pre-released Q1 results and gave forward guidance, both of which surpassed expectations. We expected the company would grow 2023 revenue by 25% (to $440 million) and the EPS loss would be around -$0.64. But with Q1 coming in better than expected (52% revenue growth to $108 million) full-year 2023 guidance has been raised to $450 million. Management also re-affirmed expectations for break-even adjusted EBITDA this year and cash flow break-even in 2025. BUY.

Enovix (ENVX) reported after the close yesterday. This was more of an operational update than an earnings release. I thought it was a positive report, essentially recapping the announcements of the last two months while confirming the company is on track for commercial production later next year. To summarize:

• Delivered 12,500 batteries in Q1 from Fab1 (Freemont, CA) and on track for 18K in Q2 and 180K for the year.
• On track to install Gen2 Autoline at Fab2 in Malaysia later this year with commercial production beginning mid-2024.
• Fab2 Line1 is expected to produce 9.5 – 18.9 million, so with four lines Fab2 should be 38-75 million batteries, depending on size.
• We’re awaiting the final financing decision with YBS, which is expected to cover CapEx for Fab2 Line1. We’re looking for $70 million or more.
• Enovix received $148 million from the recently announced convertible note offering. This should fund Lines 2-4 (management had previously guided for $50-$70 million in CapEx per line).
• Previous guidance for 2023 CapEx was $120 million. This SHOULD come in lower depending on the YBS deal.
• This video of the Gen2 Autoline shows how it should work relative to the current Fab1 Line1 in California. Check it out here.
  

The bottom line is Enovix continues to execute on its development plan, which is what matters for the next year or so. While we will need to see significant battery production ramp later next year it’s about assembling the pieces for making tens of millions of units. My guess is that management set out conservative milestone timing months ago so they could get into this “meet and exceed expectations cadence.” If they continue on that track the stock should do well, albeit with significant fluctuations along the way. I’m contemplating an upgrade to buy. Want to see how this latest release is digested. HOLD
Earnings: Done

Expensify (EXFY) pulled back this week. We have an earnings date of May 9, which is a week from next Tuesday. Analysts are looking for revenue to be up 8% to $43.7 million and for EPS of $0.08. Full-year revenue growth of 12% to $190 million is expected, with EPS of $0.37 (+19%). HOLD
Earnings: Tuesday, May 9

Flywire (FLYW) also reports on May 9. Look for revenue to grow 29% to $83 million and for a loss of six cents per share. Full-year revenue growth of 24% ($360 million) is expected, as is EPS of -$0.16. BUY
Earnings: Tuesday, May 9

Huron Consulting (HURN) will be out with Q1 results next Tuesday, May 2. Recall that in Q1 revenue in the Digital capability (44% of total revenue) rose 37% to $130.1 million. Management said healthcare (+18%) and education (+44%) were very strong markets as well. In Q1 we’re looking for revenue to grow 13% to $299.6 million and EPS to grow 35% to $0.66. For the full-year revenue is seen up 8% to $1.25 billion while EPS should grow 18% to $4.05. HOLD
Earnings: Tuesday, May 2

Inspire Medical Systems (INSP) reports on Tuesday, May 2. We’re looking for revenue to grow 73% to $120.1 million and EPS of -$0.66. For the full-year revenue is seen up 40% to $570 million and EPS is seen at around -$1.26. Management will speak at the BofA Health care Conference on Wednesday, May 10. HOLD TWO THIRDS
Earnings: Tuesday, May 2

Intapp (INTA) reports on May 8. Analysts are looking or revenue to grow 26% to $87.6 million and EPS of $0.00. For the full-year revenue is expected to grow 25% to $340 million while EPS of $0.05 would mark an improvement from -$0.12 last year. HOLD

Rani Therapeutics’ (RANI) management will speak at the H.C. Wainwright BioConnect Investor Conference next Tuesday, May 2. HOLD

Repligen (RGEN) shares have pulled back over the past week as results from Germany-based Sartorius underwhelmed. We also heard from Danaher (DHR), which reported Q1 results that met guidance on revenue and beat on EPS. But the company brought down bioprocessing growth expectations as larger customers used up less inventory than expected and emerging biotech companies (those without commercial products) tightened their belts to preserve cash. It seems safe to assume the same dynamic will show up in Repligen’s results. The only question is exactly how significant it will be and if RGEN is appropriately priced or undervalued given its trading near its 2023 low. We’ve sold a quarter of our position and will likely stick with that heading into Tuesday’s earnings report. HOLD THREE QUARTERS

Sprout Social (SPT) reports on Tuesday. Analysts expect revenue to be up 31% to $75.1 million and EPS of -$0.01. Full-year revenue is expected to grow 30% to $330 million while EPS is seen turning positive for the first time, to $0.04. HOLD HALF
Earnings: Tuesday, May 2

Terex (TEX) reports on Tuesday. Revenue is seen up 13% to $1.13 billion and EPS is seen up 41% to $1.04. Full-year revenue is expected to rise 7% to $4.74 billion and EPS is expected to rise 14% to $4.92. BUY HALF
Earnings: Tuesday, May 2

TransMedics Group (TMDX) reports on Monday. Revenue is expected to rise 127% to $36.1 million while EPS loss is seen improving by 34% to -$0.25. For the full-year revenue is expected to be up 71% to $160 million while EPS loss is seen improving by 33% to -$0.82. HOLD THREE QUARTERS
Earnings: Monday, May 1

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.