Markets are voicing their displeasure for Abiomed (NASDAQ: ABMD) after the company reported revenue growth of 35.8 percent and net income surging 140.9 percent from last year. With those strong numbers, why are investors selling Abiomed stock instead of holding it for the longer term? Mostly because they’re spooked. Let’s see if that is justified.
Abiomed reported revenue of $180 million in its first fiscal quarter. Net income of $90.1 million, or $1.95 a share, is a sharp increase from last year, by 140.9 percent and 137.8 percent, respectively. Abiomed’s nearly 50 percent run-up in the quarter already may have priced in the market’s expectations for strong growth. If this is a “sell on the news” event, then the drop could prove temporary.
Conversely, the valuations on Abiomed are unfavorably high. At a 148 times P/E and 90 times forward P/E, Abiomed stock trades at a premium. Analysts expect earnings growth of under 50 percent over the next five years. That pales in comparison to the triple-digit growth in the reported quarter.
Since the chances are high that the markets are nervous with multiples on Abiomed stock, the selling could continue for a while longer. Fundamentals are still strong.
The company’s quarterly revenue was driven by Impella adoption in the Protected PCI and cardiogenic shock indications, which grew 24% and 37% respectively. Abiomed showed strong revenue growth in Germany (up 42 percent Y/Y) and in Europe (up 53 percent).
During the quarter, the company completed enrollment for its FDA STEMI DTU safety and feasibility study. On its conference call, Abiomed spent time discussing the two priorities for driving growth. The first is driving adoption of its product through education and training.
Favorable clinical outcomes will also speed up adoption. Growing its business in Japan is the second priority for Abiomed. The company hosted a hemodynamic course in Tokyo for the first time ever. 100 physicians attended the event.
Expenses Are up This Quarter
Abiomed increased SG&A spending to support the expansion in Japan and other countries. The additional training programs, incentive compensation, and the expansion of its commercial team also led to higher operating costs.
But it outpaced the 34 percent SG&A increase with a 41 percent increase in operating income. The operating margin of 26 percent is a company record high. Investors may forecast profitability increasing further as the investments in the business bear fruit.
Balance Sheet and Abiomed Stock
Abiomed ended the first quarter with $367 million in cash and no debt. This is important for biotech investors because it implies that the company is unlikely to sell stock or debt to fund operations. By contrast, the company’s downward Q2 forecast, which is below that of Q1 results, is spooking investors.
Seasonal weakness is typical for cardiovascular devices. Catheterization labs usually slow down work for the summer while physicians take a summer vacation. Yet the slowdown may give an excuse for investors to lock in profit now. When the business picks up in three months, investors may buy Abiomed at lower prices.
Of the four Abiomed models created on finbox.io, Abiomed stock is worth $343, or around 12 percent below the recent price. Analysts, on average, are more bullish: the average price target is 12 percent above the recent price of $386. Which fair value investors should pick depends on their own view of Abiomed.
The stock still trades at valuations that price in a perfect growth trajectory, leaving no room for the management team to disappoint the market.
Abiomed is still in the early stages of getting an expanded indication for its product (through its STEMI feasibility study). If those results come with good numbers, then that would re-ignite the stock price.
Disclosure: the author does not hold any shares of ABMD.