Tandem Diabetes Care, Inc. (NASDAQ:TNDM) continues to float higher, even without any major news. The market easily absorbed the company’s $100 million equity offering which was underwritten in August 2018. Not only are those who bought that offering at $28.50 in the green, but longtime investors in TNDM stock believe that sales of Tandem’s new insulin pump in the United States will justify the stock’s strong run-up.
TNDM launched the t:slim X2 Insulin Pump with Basal-IQ technology in the U.S. on August 17. The update could enable the medical device to gain traction The device’s software uses an algorithm to predict where its users’ glucose level is headed in 30 minutes. When low glucose levels are predicted, the device stops delivering insulin. In clinical studies, the amount of time that patients’ blood had glucose levels below 70mg/dL dropped by 31%. The device also had a high usability score,suggesting that patients are unlikely to stop using it.
Investors in TNDM stock are not concerned with Tandem’s second-quarter loss of $1.17 per share. During the period, TNDM saw its revenue surge 60% year-over-year to $34.13 million. TNDM benefited from a 59% YOY increase in pump shipments, as it shipped 5,447 pumps. Operating margin, a key number for a firm in the early phases of growth, rose to -41%, up from -89% in last year’s Q2. As the company’s sales accelerate in the wake of the launch of the X2 Insulin Pump in the U.S., there is a good chance that unit sales of the device will surpass expectations.
Meanwhile, management raised its sales guidance for the full year. It now expects revenue of $140 million to $148 million, representing YOY growth of 30% – 38%.
Strong Balance Sheet
TNDM ended the second quarter with $86 million in cash, up from $14 million last year. The strong cash balance suggests that the company will not need to sell more shares of Tandem Diabetes stock in the next 12 months. Near-term headwinds are also manageable. Even though the company’s costs exceeded its revenue, its sales are set to accelerate in the next few quarters. Tandem’s SG&A costs have been steady over the last year, while its R&D costs rose from $4.866 million in the second quarter of 2017 to $6.456 million last quarter. R&D costs will moderate as the company shifts from early development of its device to selling it.
Growth Drivers for TNDM Stock
Having met its growth targets at the start of the year, Tandem must seek to convince more diabetes patients to adopt its product in order to enable its revenue to keep rising. Questionnaires returned by users of the device suggest that they are very pleased with it. As the product is updated and more diabetes patients become aware of it, the company’s sales should accelerate.
Tandem’s gross margin could also rise, depending on the product mix and how many of the pumps are sold directly and through distributors. Management is aiming for gross margins of 55%. Seasonal strength will give TNDM stock another top line lift as demand picks up in the fourth quarter. The Q4 surge may even help the company’s gross margins exceed its 55% forecast.
The Valuation of Tandem Diabetes Stock
The nine analysts covering TNDM stock have an average price target of $43, which is below the recent price of around $46. If Tandem does not grow its revenue over the next decade at a compound annual growth rate of more than 15%, the fair value of Tandem Diabetes stock will be in the $35 range.
The Outlook for TNDM Stock
Tandem offers a unique device that helps patient easily manage their diabetes. With no competition, the company will easily grow its market share this year. Investors in TNDM stock are betting on this, too, so Tandem does not have too much room for error, but the company’s growth drivers and strong new product make its overall outlook favorable.
As of this writing, Chris Lau did not own shares of any of the companies named in the article.