Senseonics Holdings (NYSEAMERICAN:SENS) is getting a lot of chatter these days. The maker of glucose-monitoring products is having a strong year in the markets. SENS stock is up more than 111% year-to-date through April 22.
However, as I write this, its share price is down more than 5% on the day. At one point this year, SENS stock traded as high as $5.56. Down 65% from its 2021 high, here’s why that doesn’t make it a buy-on-the-dip stock.
SENS Stock Has a Past
When I hear about a stock followed by the Reddit crowd, the first thing I do is to go to its 10-K and check out its accumulated deficit. I’ll explain why in a moment. But first, let me bore you with a little history lesson.
The Senseonics story dates back to 1996. It began working on its Eversense continuous glucose monitor (CGM) in 2010, according to a January 2016 article by MobiHealthNews. The publication stated that Senseonics had 239 patents issued, including 37 in the U.S. and another 111 pending worldwide.
Impressive.
In December 2015, it merged with ASN Technologies, a publicly traded company formed a year earlier to design a location-based mobile application to share nearby social events. As part of the merger, ASN changed its name to Senseonics Holdings and disposed of its legacy business.
“The completion of the merger marks a significant milestone for Senseonics as we debut as a public company, backed by a group of highly regarded investors who support our pursuit to commercialize our continuous glucose monitoring system for people with diabetes,” Tim Goodnow, Senseonics’ CEO said at the time.
If it’s any consolation to long-time investors, the fact that Goodnow is still CEO is a positive.
Fast Forward 5 Years
Ok, now I can tell you why I check the accumulated deficit of Reddit-backed companies. It’s because Reddit followers don’t seem to understand or care what an accumulated deficit actually is.
It’s the opposite of retained earnings, something that Warren Buffett absolutely loves.
When you accumulate losses over many years, you build up an accumulated deficit on your balance sheet. Now, if you then go on a major roll generating massive profits over an extended period, your deficit is erased, and in its place, you have retained earnings.
So, an accumulated deficit isn’t a death sentence, but it should send up a major red flag.
To be fair to Senseonics, its merger partner ASN Technologies had already built up its accumulated deficit, so I can’t be too hard on Goodnow and company.
At the end of 2015, its accumulated deficit was $160.8 million, $113 million of which was due to a 12-for-1 forward stock split in October 2015. In 2017, it jumped to $204.7 million on a $43.9 million loss. Fast forward to 2020. It finished the year with an accumulated deficit of $648.5 million and a loss of $175.2 million on $4.9 million in revenue.
Now, before you rip my head off for pointing this out, I realize it costs money to develop products like the Eversense and Eversense XL CGM systems. After all, Senseonics worked on its development for eight years before the Food and Drug Administration (FDA) approved the Eversense system in June 2018.
I might point out, however, that the company’s 2020 sales of Eversense fell by 77% to $4.9 million due to poor sales outside the U.S.
How many years will it take Senseonics to erase this deficit? It could easily take a decade or more.
The Bottom Line
Senseonics is currently waiting on approval for an updated version of the Eversense CGM that will double its lifespan from 90 days to 180. The FDA suggests that decision could be delayed by two months due to other Covid-19 issues taking priority. Meanwhile, SENS stock has lost 33.3% in the past month.
My InvestorPlace colleague Mark Hake really likes Senseonics’ chances to hit a home run with its Eversense 180 product. I definitely understand his argument. Furthermore, the company has $515.2 million in net operating loss (NOL) carryforwards which expire in varying amounts between 2021 and 2037. Should it ever make money, those will certainly help.
If you’re using fun money and can afford to lose the entire investment, I don’t see a problem taking a flyer on Senseonics. However, if you can’t take mounting losses, SENS stock definitely is the wrong call.
The balance sheet says so.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
