When a stock jumps over 85% higher in a month and around 30 percent in just the last week, value investors would typically lose interest in the stock. That is what happened with Tandem Diabetes Care Inc (NASDAQ:TNDM). TNDM is up an astounding 194% from its February lows. Value investors would likely only consider buying TNDM stock on a pullback. But momentum traders and speculators might want to come along for the ride in Tandem.
Regardless of one’s investing style, the first step is looking into why Tandem Diabetes stock is soaring since February and then picking up steam in April.
Why Tandem Stock Is on Fire
On March 1, Tandem reported 2017 pump shipments of 17,061, which is similar to 2016 levels. For the quarter, however, pump shipments soared from 4,418 in 2016 to 6,950 year over year. This represents the highest sales quarter in the company’s history.
Expenses of $107 million for the year led to the GAAP operating loss of $62.9 million — less than the $78.1 million loss a year earlier.
Enthusiasm in the stock may stretch beyond the company’s success in pump shipments. Tandem has also broadened its business by launching t:slim X2, new infusion sets and transitioning its manufacturing to a new facility.
This investment in manufacturing signals that the company is confident the high demand for its core products will continue this quarter and throughout the year.
Last August, TNDM also announced t:slim X2 integration with Dexcom G5 Mobile CGM (continuous glucose monitoring). This announcement set new standards for the G5 integration and offered this feature to existing and new customers. This represents a huge step forward in diabetes monitoring.
Not only does this allow diabetes patients to continuously and instantly monitor their glucose levels, it allows them to stay more up to date with new technology. The t:slim X2 is currently the only insulin pump capable of remote software updates. The company’s announcement points out that many insurance companies will only pay for a new pump every four years. Software updates allow t:slim X2 users to stay up to date with the latest technology without buying expensive new pumps.
TNDM Financing Completed
Tandem wrapped up a successful round of financing, which brought in $69 million. The company originally offered 30 million shares at $2 each — the underwriters ended up purchasing 4.5 million additional shares at that price. The oversubscription speaks volumes to the investor interest in the company.
The combination of higher liquidity and a goal of reaching cash flow breakeven by the second half of 2019 suggests TNDM stock is actually undervalued.
TNDM Growth Strategy
On its conference call, management said Tandem would grow by expanding its business in markets outside of the U.S. in the second half of this year.
Tandem has filed a medical devices application in Canada and will receive a CE mark sometime between the first and second quarter. In Canada, Tandem will operate as a direct sales and clinical operation. This will keep operating costs low — but sales will depend on word of mouth, recommendations from the health care channels and advertising.
In other geographic markets, Tandem will use distributors that already have an infrastructure and the resources needed to support sales.
TNDM Gross Margin Forecast
The combination of new manufacturing operations, global expansion and higher product demand gives management the confidence to forecast long-term gross margin of 55 percent. Tandem forecast sales of $132-$140 million in 2018.
Seasonal weakness in the current quarter (Q1) will limit the pace of sales growth in the near term. But the installed customer base of 80,000 should raise the company’s chances of meeting its break-even goal in 2019.
Bottom Line for TNDM
Tandem has positive momentum in its business. The only true competitor for its pump is Medtronic plc (NYSE:MDT). However, Tandem differentiates itself and widens its gap from Medtronic through the pace of its innovation. Today, Tandem is ahead on the development of automated insulin delivery programs.
Tandem’s TSLIM is getting compared to Medtronic’s 670 online — by satisfied customers. Consumers are chatting about the value and innovation with the T-slim. Since 2018 is a make or break year for Tandem, having happy customers talk about the product will only help the company meet the ambitious growth goals it set for 2018-19.
Chris Lau does not own shares in any of the companies mentioned.