Vapotherm Stock: Speculative, but High-Upside Industry

I am neutral on Vapotherm (VAPO) as it operates in a high-upside, innovative industry and enjoys the support of Wall Street analysts with an average price target that implies massive upside over the next year. However, the company is very speculative as it is far from profitable and is currently facing declining revenue.

Vapotherm develops medical technology products, specifically respiratory devices for treating breathing disorders. The company is focused on the commercialization of proprietary high velocity therapy products and currently offers flow systems, such as Precision Flow Classic, Precision Flow Heliox, and Precision Flow Plus.

Its flagship products deliver oxygenated, heated, and humidified air at a high velocity through a small-bore nasal interface. Other products include the Vapotherm Transfer Unit, Q50 compressor, and aerosol aeroneb adaptor. 

The company generates the bulk of its revenue from selling proprietary Precision Flow systems to hospitals. Its client base mostly exists in the United States but it has distributors in select countries outside the U.S.

Strengths

Any company that specializes in products to treat respiratory diseases will thrive with Vapotherm at the industry’s helm. This is why its stock value continues to soar past new records every week and continues to climb. New variants of the global pandemic continue to threaten the healthcare industry, placing more demand for respiratory products.

Perhaps more importantly, its Precision Flow systems are so useful that it can bypass the need for an oxygen mask for many patients in need of respiratory aid. This allows patients to eat, drink, and socialize while receiving oxygen therapy. These are things they can’t do while using an oxygen mask.

Recent Results

VAPO had a total revenue for the third quarter of $38.1 million, representing an increase of 24.7% over the third quarter of 2020. To contrast this, VAPO had a net revenue of only $48.1 million in 2019. 

Its outlook for full-year revenue in 2021 is $106 million or higher. With that said, the company’s biggest sales come from single-use disposable products instead of Precision Flow Hi-VNI units.

Valuation Metrics

VAPO stock is very difficult to value given that it is not generating any profits and has high growth potential. 

It currently trades at an enterprise value-to-forward revenue ratio of 4.5x. Meanwhile, revenue is expected to shrink by 5.2% in 2022 after falling by 13.7% in 2021. As a result, VAPO appears headed for disappointing long-term returns unless it can reignite revenue growth and scale towards profitability.

Wall Street’s Take

According to Wall Street analysts, VAPO earns a Moderate Buy analyst consensus based on two Buy, zero Hold, and zero Sell ratings in the past three months. Additionally, the average VAPO price target of $39 puts the upside potential at 145.8%.

Summary and Conclusions

VAPO stock has high potential given that it is a medical technology and devices company. If it can effectively innovate to develop products and technologies that can truly enhance people’s lives and then market those products successfully, it could scale rapidly to become wildly profitable. This, in turn, could generate fantastic returns for shareholders.

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