To The Moon

Summary

• TransMedics presents an intriguing investment opportunity due to its ongoing efforts in international expansion and consistent three-year growth trend in overseas revenue.

• The company currently maintains a 'hold' position from me based on its current financial performance and valuation.

• While international expansion introduces new risks and complexities, successful navigation in these markets could significantly enhance the company's long-term value.

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Companies at the forefront of medical innovation are gaining investor interest, including TransMedics Group (NASDAQ:TMDX), a pioneer in organ transplant technology. With their Organ Care System (OCS) technology, they are breaking barriers in transplantation and providing hope for those on waiting lists worldwide. My thesis explores the potential for TransMedics to spread their OCS technology worldwide, given the universal demand for organ transplantation and evolving healthcare standards.

However, due to the company's valuation and rocketing share price, I ultimately rate the company as a Hold as investors may be able to pick it up at a cheaper price in the foreseeable future.

Company and market overview

Traditionally, cold storage has been used for organ transportation, but it can negatively impact the organ's quality due to blood flow loss and cold-related cell damage. TransMedics' OCS technology mimics natural body conditions and is a better way to preserve organs, reducing wastage and expanding transplantation opportunities. With its preservation techniques, TransMedics can meet the global demand for transplants, which are expected to rise as time goes on.

The World Health Organization reports that despite transplant success rates increasing, only 10% of the anticipated demand for organs is being fulfilled, highlighting the urgent necessity to create fresh techniques that increase the limited number of organs available for transplant.

Due to these factors, the global transplantation market size is set to hit around $33.7 billion by 2032, according to Precedence Research. North America is the region with the largest revenue share, accounting for 42% of the market at the time of writing. We can therefore estimate that the international market will account for roughly $19.54 billion of that total market size by 2032. According to the report, the largest international regions are Europe and Asia Pacific, with these segments divided fairly equally.

The statistics and estimations regarding the market size and growth prospects demonstrate the potential for TransMedics to enter and expand within this industry. This is due to their unique technology for preserving organs, which puts them in a strategic position for potentially capturing a notable portion of this growing market.

TransMedic's international expansion

As the incidence of acute diseases leading to organ failure increases globally the demand for organ transplantation solutions also rises. TransMedics' unique organ preservation technology could address these unmet needs on a global scale, potentially improving patient outcomes and increasing the availability of viable organs for transplantation.

TransMedic could also diversify its operations by expanding internationally, which would reduce its dependency on a single market (The U.S). This in turn would help mitigate risks associated with regulatory changes, market saturation, or economic downturns.

It's also noted that as competition in the United States increases, the company may face margin compression, and the developing world and other international markets offers the most room for growth since it has yet to make a significant effort in expanding in these regions.

Developments in TransMedic's OCS technology may also facilitate longer distance transportation of its organs between countries. Management made the following comments in the latest earnings call, which suggests to me that international expansion plans could already be in motion.

To make this more interesting, between 2020 and 2022, the OCS technology became FDA approved in the United States, and the NOP was established. This shift led to a very important shift in the United States organ placements because the OCS enables safe, longer distance procurement across the entire country and from outside the Continental U.S. like Hawaii, Alaska, Puerto Rico and Canada.

Financials and valuation

While much of the attention has been focused on the company's United States segment, the company has a small but growing segment of international revenue already growing YoY according to its most recent quarterly report.

This figure jumped 74.77% from 2022 to 2023 in the same reportable period. International revenue now represents around 9% of TransMedic's total revenue.

Author supplied

Although the international segment at present is small compared to its total revenue, international markets may also offer the most room for rapid growth and to establish its competitive advantage in countries outside of US borders. This is particularly true for countries that have significant aging population issues, such as Japan, rising incidents of disease and other sicknesses that are prevalent in the developing world.

There's also the case to be made that sooner or later, TransMedic's explosive revenue growth in the US will begin to slow down. Competition and natural forces of saturation and diminishing returns could be how it happens. Although it's not expected to happen for a good amount of time from now, it's a very real threat as well as an opportunity for the company that must be respected and explored.

Ratios

Although I foresee international markets to be a significant tailwind for the company, its valuation is where my thesis makes it a Hold recommendation.

Author supplied

Based on the above valuation ratios, TMDX stock appears to be overvalued compared to the industry. The negative PEG ratio suggests that the stock may be overpriced relative to its earnings growth potential. The high P/S and P/B ratios indicate that investors are willing to pay a premium for TMDX's sales and book value.

The concerning part is that it trades at a high premium based on a P/S basis. Some of this overvaluation of course can be chalked up to its impressive share price rally. The stock has been bouncing around the overbought levels on the RSI and Bollinger Bands for some time on the weekly charts, but has since reverted to the long-term average.

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However, on the monthly charts, it has only just started to come back down towards its average price, with the RSI dipping into overbought territory recently.

With these charts in mind, I don't believe now is the ideal time to buy the stock as it's certainly not cheap in terms of its fundamentals as well as technicals.

The technicals suggest a shift in momentum towards the downside. So bullish investors would be worth waiting a few months to accumulate shares, as this seems where we're headed.

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Losses and margin expansion

It should be noted that the company's losses on a free cash flow basis have increased year over year. The FCF decreased from 2020 to 2021 by $15,630,000 and decreased again from 2021 to 2022 by $25,410,000.

Although its revenue growth has been impressive, its COGS and operating expenses have also leapt forward. COGS surged from $9 million in 2020 to $28.2 million in 2022, while operating expenses surged from $43 million in 2020 to $96.7 million in 2022.

However, there's some good news in terms of the company's margins. There's a clear trend of improvement in its operating and net profit margins. Although they are far below industry averages at present, if this trend continues it will chart its ways towards profitability.

Author supplied

Risks

Although international expansion offers growth and increased valuation possibilities for TransMedics, it is also associated with several risks. Navigating through diverse regulatory environments is a major challenge as failure to comply with regulations put the business at jeopardy. I see this as the biggest risk when it comes to expanding beyond the United States borders.

Although the developing world holds the most potential, it may be compared to the Wild West in many nations due to the prevalence of issues such as corruption, bureaucracy, nepotism, as well as a general distrust of Western countries. Navigating this environment is significantly more complex than say, expanding throughout developed countries in Europe or in Oceania, although they too have complexities of their own.

Further operational complexities can make it hard to maintain efficient operations and flexibility across different countries. Increased competition can put pressure on pricing, affect market share and profit margin. Furthermore, currency fluctuations can significantly impact the company's financial stability due to international operations.

Conclusion

To summarize, I feel that the company deserves a Hold recommendation, based on its overvaluation on several key metrics such as P/S, its inflated share price caused by a strong but reversing rally. As for the positives, it's increasing its net and operating profit margins along with soaring revenue growth.

The company also has great potential due to its expansion efforts, particularly in the international market. This presents possibilities for growth in the long run, despite the inherent challenges and risks. In light of these factors, TransMedic stands out as a company for investors to keep on their watchlists.

$TransMedics Group, Inc.(TMDX)$

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