Butterfly Network Stock: Weak Growth Adds To Downside Risk

seekingalpha04-04

Butterfly Network is commercializing an AI-powered handheld ultrasound device but only expects modest growth in 2024.Recurring losses and a large cash flow bleed are expected to continue through 2025....

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(NYSE:BFLY) has launched the FDA-cleared \"Butterfly iQ3\" as an AI-powered handheld ultrasound device seen as a cost-effective alternative to traditional body-scanning equipment. While the product coupled with an app ecosystem is compelling with various applications, the challenge has been executing an effective commercialization strategy. The company has reported large losses with only a modest growth guidance for 2024. Ultimately, we believe the company is in a race against time as its balance sheet cash position will be tested before reaching sustainable financial momentum. Our base case is for BFLY to remain under pressure with risks tilted for more downside. Data by YCharts BFLY Financials Recap BFLY last reported its Q4 results in February with an EPS loss of -$0.21, down from -$0.17 in the period last year. Revenue of $16.5 million, declined by -13.1% year-over-year with management citing the comparison period in 2022 that featured several non-repeating large orders. Within that amount, software and other services revenue at $6.4 million was flat from Q4 2022. The bigger story this quarter was the company's reorganization efforts toward improved financial efficiency. Over the past year, Butterfly reduced costs intended to save approximately $60 million per year in annual cash burn. Those steps were evident as total operating expenses for the year declined by -30%. The Q4 adjusted EBITDA loss of -$15.7 million compares to -$27.7 million in the prior year quarter. At the same time, there is a question as to how much further room there is for cost cuts while balancing the necessary investment spending towards R&D and marketing. We mentioned the launch of the Butterfly iQ3 which was cleared in the U.S. in February as an update to the previous version of the probe hardware. The main improvement is a smaller and lighter profile, improved battery, and new configurable button controls. The company is also moving forward with its \"Butterfly Garden\" marketplace which is intended to allow third-party development of specialized applications that can work within the software ecosystem. source: company IR Capital Raise Likely Butterfly ended the year with $134 million in cash and cash equivalents against effectively zero financial debt. On the other hand, the company lost approximately $99 million in cash last year from operations. With a 2024 adjusted EBITDA loss guidance between -$60 million and -$50 million, marginally improving from the -$68 million in 2023, the expectation is for a continued cash bleed with revenue growth in the \"low double-digit\" this year. On this point, a highlight of the company's recent investor event was an announced target to reach cash flow breakeven by the end of 2027 and to exceed $500 million in revenue by 2030. An ambitious goal we'll need to see some progress over the next few quarters. The argument we make is that even if the cash flow loss narrows going forward, a capital raise will be required sooner rather than later as potentially dilutive to existing shareholders. Typically companies need to have a cushion covering several quarters of operations which may become tight toward the second half of this year. The problem here is that a share issuance at the scale necessary to support the scale of the targeted operation would likely require $50 million or more, in the context of the company's current $210 million market cap. This was a risk the company disclosed in the latest 2023 annual report. Before we reach 2026, we expect to raise capital in order to reach profitability. We expect to first seek nondilutive capital in the form of grants or debt and then potentially in the form of equity securities. Data by YCharts What's Next For BFLY? If we haven't been clear enough, the takeaway here is that we're very skeptical of Butterfly as an investment opportunity focusing specifically on the current financial weaknesses. The probe device will certainly find a market but we're not convinced it's as \"revolutionary\" as the company claims or whether the $500 million in annual revenue goal by the end of this decade is attainable. The first point here is that Butterfly is not the only maker of a \"portable\" ultrasound device with major manufacturers like Koninklijke Philips N.V. (PHG) marketing the \"Lumify\" platform. Other companies in this segment include privately-held \"Clarius Mobile Health\" or \"Caption Health\" which also incorporates AI imaging in a handheld device. There is also an argument to make that for all intents and purposes- a conventional cart-based ultrasound device is an effective model in many settings. So what we have here is a case where the apparent technological advantages of the Butterfly iQ3, or its Compass software management system, are not necessarily the disruptive innovation that would support a long-term growth runway. source: company IR According to consensus, from 11% expected growth this year, revenues are seen to jump by 24% in 2025 while EPS remains negative. Ultimately, this path may not be enough to warrant a sustained rally in the stock price. In terms of valuation, BFLY still trades at around 3x forward sales where the bearish case would suggest a discount that is justified given the lack of earnings prospects. Seeking Alpha Final Thoughts We rate BFLY as a sell, which can be interpreted as an avoid rating for anyone just looking at the stock for the first time. For current shareholders, we'd say that the outlook remains highly speculative with the risk of a further selloff. On the upside, the onus is on Butterfly Network to demonstrate it can begin to capture market share by moving an increasing number of the iQ3 units with stronger sales momentum over the next several quarters. Monitoring points here include the cash flow levels and the gross margin.  Editor's Note: This article covers one or more microcap stocks. 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