To The Moon

$TransMedics Group, Inc.(TMDX)$

For a small-cap company, few have made headlines as frequently over the past three months as TransMedics Group. The company has developed a groundbreaking system that keeps hearts, livers, and lungs alive longer, allowing for extended transport distances in organ donation.

The stock has experienced significant volatility, and today, after reporting earnings post-market close, it is up about 5%. But does this signal the end of its turbulence, or is there more uncertainty ahead? Let’s take a few minutes to break it down.

This was TransMedics’ fourth quarter of 2024, so let’s dive into the results. Revenue surged 50% year-over-year to $122 million, surpassing analyst estimates and the midpoint of the company’s full-year guidance. Earnings per share came in at $0.19, a significant improvement from last year and ahead of expectations.

Margins and Profitability

• Gross margins saw a slight expansion.

• Operating margins, arguably the most critical metric, improved meaningfully.

• Net margins also increased.

• The company reported positive free cash flow of about $6 million for the quarter, though it remains negative on a full-year basis.

Balance Sheet & Expansion

TransMedics' balance sheet is currently “upside down,” meaning it has more debt than cash. The primary reason? The expansion of its logistics network, which included the purchase of 19 planes by the end of Q4 (now up to 21, with plans for 22 by year-end).

Revenue Breakdown

• Product revenue (mainly consumables required to sustain organs) saw strong growth and high margins, nearing 80%.

• Service revenue (primarily organ transportation) saw gross margins decline from 34.5% to 29.2%, as more organs were transported using TransMedics’ logistics network, a lower-margin business.

Key Financial Trends

• Revenue grew 50%, while operating expenses increased 40%—a positive sign of efficiency.

• Operating income more than tripled, rising from $2.6 million to $8.6 million.

• Net income increased by 73%, though diluted shares outstanding grew by 3%.

Organ-Specific Growth

TransMedics generates revenue from three types of organ transplants:

• Liver (largest contributor): Grew 62%, though its growth rate is slowing.

• Heart: Up 40%, but decelerating from previous quarters.

• Lung: Smallest contributor, up just 6%, but new updates could drive adoption in the future.

Short Float

As of the most recent data, TransMedics Group (TMDX) has a short float of approximately 30-35%, though this can fluctuate frequently based on market conditions.

A high short float (above 20%) indicates a significant portion of shares are being shorted, suggesting skepticism from investors or hedge funds. However, it also means TMDX could be a candidate for a short squeeze

The Bigger Picture

Looking at revenue trends, product revenue growth accelerated slightly from Q3 to Q4—an encouraging sign. Meanwhile, service revenue, which has seen explosive growth, is beginning to slow as expected.

It's also worth noting that TransMedics is slowly expanding internationally. However, at this stage, its overseas operations remain relatively small, growing just 10% year-over-year. While this provides some optionality for future growth, it’s not a major focus at the moment.

Shifting gears, the company’s guidance for the year projects 22% revenue growth. Interestingly, this aligns with market expectations. However, since TransMedics outperformed expectations this quarter, the starting base is now slightly higher, meaning analysts are now anticipating closer to 18% growth. Historically, the company has had a strong track record of exceeding and raising guidance, which is something investors like myself are hoping to see continue.

Now, let’s talk about this key point—market share. There’s been a lot of discussion, including from myself, about TransMedics' impressive technology, but also concerns about its high cost and alternative transplant methods, such as Normothermic Regional Perfusion (NRP), which is gaining traction. Ultimately, this all comes down to market share, and management provided valuable insights on this during their earnings call.

From 2023 to 2024, TransMedics increased its overall market share across all three organs from 13.8% to 20.9%—a very positive sign. However, the key question is: how much of this growth occurred in the second half of the year versus the first? Unfortunately, we don’t have a clear answer yet.

Breaking it down by organ:

• Liver transplants: Market share rose from 17% in 2023 to 27% in 2024.

  For transplants from brain-dead donors (where the heart is still functioning), market share increased from 9% to 17%. This is notable since this isn’t the primary use case for TransMedics’ technology.For transplants from cardiac-death donors (where the heart has stopped), market share climbed from 50% to 53%. The question now is how much more market share they can realistically capture.

• Heart transplants: Market share grew from 16% to 19%.

  For brain-dead donors, they didn’t disclose year-over-year growth, which suggests minimal gains.For cardiac-death donors, they now account for two-thirds of heart transplants.

Another key point is that the overall growth in the transplant market—particularly for liver and heart—appears to be roughly equal to the number of transplants facilitated by TransMedics. This suggests the company is not just gaining market share but could also be contributing to overall market expansion in the U.S.

Key Metrics to Watch Moving Forward:

1. Market Share Trends – Management typically provides full-year updates, but any insights throughout the year will be crucial.

2. Gross Margins – While product margins are improving, service margins are under pressure, which is expected.

3. Adoption of New Programs – TransMedics has upcoming initiatives aimed at increasing adoption for heart and lung transplants, which could be a significant driver in the year ahead.

Keeping an eye on these trends will be essential in evaluating the company’s long-term trajectory.

on Operating Margins & My Investment Approach, Overall, I remain cautiously optimistic about TransMedics' trajectory. But what does this mean for my own portfolio, and how does the company’s valuation look today? I’ll get to that in just a moment.

Evaluating TransMedics' Valuation

Valuing TransMedics is tricky. Let’s break it down using a few different metrics:

Price-to-sales ratio: Currently at ~6x sales, compared to its historical average of ~18x sales over the past five years. This suggests it may be undervalued. However, it's important to note that the company didn’t have its aviation division before, which has lower margins—partially explaining the decline.

Price-to-gross-profit ratio: Currently at ~10x gross profit, about one-third of its historical average. Again, the addition of the aviation unit affects this metric. Forward price-to-operating cash flow: Trading at ~25x expected operating cash flow, compared to its multi-year average of ~67x.

Forward price-to-free-cash-flow: Currently at ~78x, though this metric is less meaningful due to the company’s ongoing investment in its logistics network (including new planes).

Reverse Discounted Cash Flow Analysis

Since TransMedics isn’t yet free cash flow positive, we need to estimate its potential long-term value. Assuming the company eventually reaches 20% free cash flow margins, this would equate to around $90 million in free cash flow today.

Using standard assumptions for growth and discount rates, a fair value range would be around $72–$75 per share. To justify today’s stock price, revenue would need to grow approximately 133% over time.

Analysts currently expect:

• 22% revenue growth in the next year

• 22% revenue growth the following year

The key question is: What happens in the years beyond that? That will depend on:

Adoption of new heart and lung transplant programs—how much additional market penetration can TransMedics achieve? Competitive landscape—how will alternative transplant methods impact market share?

Ultimately, these factors will determine whether TransMedics can sustain its growth and justify its current valuation.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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