Analysts expect this medical device company to post 20% annual growth for the next five years.
Nevro Corp. (NVRO)
From Canaccord Genuity Research
We would buy weakness in Nevro Corp. (NVRO), which traded down ~15% AMC following a Q1 print that came in below lofty expectations (we were the biggest culprit admittedly, with Street-high estimates).
On one hand, 33% Y/Y Q1 revenue growth puts NVRO in rare company, especially for a company with its revenue run-rate (>$350M). On the other hand, relative to consensus expectations (at $89.5M), $87.6M disappointed, in large part due to higher seasonality than we appreciated.
In short, we implore investors not to “throw the baby out with the bathwater” as we believe we’ve seen this movie before. Looking back to 1Q17, NVRO’s first Q/Q sequential decline (-5% US) similarly dropped the shares ~15% to the ~$75 level, eventually declining to ~$66 as investors fretted about perceived slowing growth and Q/Q share loss. Soon thereafter, NVRO preannounced strong 2Q17 earnings, sending shares back up to pre-1Q17 levels.
While NVRO currently is a larger company, and thus faces more challenging Y/Y comps due to its ability to scale to date, we think the business, structurally, is on very solid footing. To wit, management suggested sales rep attrition has not changed, while the firm continues to add (net) healthy numbers to its domestic salesforce.
Some investors may over-emphasize sequential trends in NVRO’s business (-13% in US) and draw what we would consider an ill-conceived conclusion (i.e. systemic share loss trend). However, we opine that NVRO’s Q1/Q4 sequential comparison was uniquely challenging, noting: 1) the firm’s blowout Q4 print (+44% y/y and +22% q/q, which was the strongest of the year), 2) strong Q4 impacted reps’ ability to execute normal trial-to-permanent sales in Q1, 3) two competitors (BSX and MDT) effectively had new product launches during Q1, undoubtedly leading to some competitive trialing, and 4) seasonality has become more impactful to NVRO now that the company has reached this scale vs. competitors who are much larger, thus have already settled into their seasonality trends. Looking at Y/Y growth, NVRO clearly gained significant share (+33% in US vs. ~15% for market).
Finally, we look at valuation. Even considering our more conservative revenue growth estimate for 2018 of 25%, coupled with estimated GM of 70.7% (+300bps Y/Y), we believe the stock is materially undervalued when viewed through the lens of our S/Mid-cap Med-Tech regression curve.
In sum, while the quarter was clearly not the result we expected, we think the right move for investors, when they look back 12 months from now, will have been to accumulate shares on weakness.
We specifically favor the positive tailwinds to the SCS market in general (e.g. opioid alternatives), coupled with specific moves being made by NVRO, including a) continued expansion of NVRO’s sales force driving more share gain, and b) potential for upcoming TAM expansion (especially within the peripheral diabetic neuropathy patient population, which we believe Senza HF-10 therapy is uniquely positioned to address).
We maintain our BUY rating and adjust our target to $102 from $110.
Jason Mills, Cecilia Furlong, and David Rescott, Canaccord Genuity Research, www.canaccordgenuity.com, May 8, 2018