Why Outset Medical Is Worth a Look

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• Outset Medical shares rising 20% on its announcement regarding shipments.
• How the FDA's thinking and Outset Medical's are aligned.
• Pepsi taking a $550 million stake in energy drink maker Celsius Holdings.

Plus, Motley Fool producer Ricky Mulvey talks with Motley Fool senior analyst Asit Sharma about becoming less distracted as an investor, and an insurance company with a very clear focus.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on August 1, 2022.

Chris Hill: If you're feeling distracted as an investor, you're not alone. We're going to see if we can help with that. Motley Fool Money starts now. I'm Chris Hill and I'm joined by Motley Fool Senior Analyst Jason Moser. Happy August.

Jason Moser: Man, August already. Happy August indeed. But that is moving by fast, isn't it?

Chris Hill: It certainly is. We're actually going to revisit a couple of stocks that have been talked about on this show recently. I want to start with Outset Medical because this was a stock on your radar a couple of weeks ago on the radio show. For those unfamiliar, what is the 20-second version of what Outset Medical does?

Jason Moser: Outset Medical is in the business of dialysis. They have a machine that they've developed called the Tablo. It's a dialysis console. Ultimately, dialysis historically has been seen as expensive, cumbersome, tough-to-schedule process. There's a lot to it and it's not terribly convenient. But it is a necessary treatment for a large population of individuals out there. Outset set out to develop a dialysis machine that ultimately utilizes wireless technology in order to help make the process easier, more affordable, and more convenient. You don't necessarily have to go to a hospital or a clinic, there are in-home uses. That is what Outset does.

Chris Hill: Earlier this spring, the FDA came out, and basically said, "We're going to need some tighter restrictions on what Outset is doing," and the stock got cut in half. In mid-July, on the radio show, you made it your radar stock because, and I'm paraphrasing, but you said at the time, Jason, that what the FDA was pushing for was actually very much in line with what Outset Medical was trying to accomplish. Do I have that right?

Jason Moser: Yeah, generally speaking, yes, that's a good way to look at it. It's worth mentioning that Outset pursues two ultimate markets. They have the acute market, which is ultimately your hospital settings, and then they also pursued the home market. That also includes clinics where dialysis is performed. But ultimately, one-on-one of Outsets claims to famous here, they are the first hemodialysis system on the market with FDA clearance for two-way wireless data transmission. This Tablo console is something that it's not necessarily new to the market, it's already FDA cleared. But what the FDA was ultimately looking for was a little bit more rigor on some enhancement they made to the system as it pertains to the in-home use. As you can imagine, if you're bringing something like dialysis into the home, you need to make it as user-friendly as possible, and you need to make it almost mistake-free. You have to have every opportunity to be able to get this thing right.

They've done a really good job of that over time, and they've made some recent enhancements to the system and the software that runs the system. Ultimately, the FDA was looking for just some added clarity, some added rigour, and so what Outset did back on June 13th, they suspended the in-home shipments of the device in order to accommodate what the FDA was ultimately looking for. To me, it felt like this was just a matter of when they would resume shipments as opposed to if because of the FDA clearance that they've already achieved, that they've already been able to accommodate. Management was very transparent back in June when this happened. This was not something where the FDA laid the hammer down and said, "You must suspend shipments." It was more or less a mutual understanding, and the transparency there on the call, I felt, was another sign that really, management was taking this very seriously and just wanted to make sure they had all of their ducks in a row.

The acute demand remains very strong. Frankly, the in-home demand remains very strong as well, even during this brief hiatus, this brief suspension of shipments, and there have been zero safety issues with the Tablo system. This is really, by all accounts, a very successful roll-out. To me, it just struck me as something that management was on top of. Because they have this status as the first FDA clearance for a two-way wireless data transmission, it struck me that perhaps this could be one of those things where the additional FDA rigor could help separate them even more with any potential competition. When you look at the market opportunities are pursuing $2.5 million in the acute market, but about $9 billion market opportunity in in-home market there. There's a lot of opportunity on the table for such a small business here that's just doing a few $100 million in revenue still today. We got the news today, thankfully, that the in-home shipments have resumed, the additional rigor the FDA felt met the standards of what they were looking for, and it's back to business as usual for Outset, which is very encouraging, of course.

Chris Hill: Its stock is up more than 20 percent this morning. This is a company that has been public for less than two years. As you said, it's a small company, and market cap is just under $1 billion. How much of an acquisition target do you think this company is? Let me put it another way. As a shareholder, is that something that concerns you at all? Because you're clearly a fan of the business, and I'm sure you'd like to see it run on its own for awhile. How much is that in the back of your mind?

Jason Moser: Well, it definitely resides in the back of my mind for sure. It's something I think about constantly because we see a lot with these medical device companies that they can be very attractive takeover targets for larger players in the space. When you look at all companies out there that do all things in the MedTech space, this is still, as you mentioned, a very small company, so it would be a very easy acquisition if somebody decided they wanted to come in there and take it over. I do hope, as you mentioned, that they have an opportunity to let things go on their own because there is a nice razor and blade model here at play where that console is the gateway, but then the additional services and the software they come from that very high-margin, very specific to that Tablo device. It presents a very attractive opportunity for investors, for sure. But by the same token, you have to feel that the larger players in the healthcare space are looking at this company and thinking, "Wow, they're onto something pretty special." It's a big opportunity in a space that really isn't going away. There's no substitute for dialysis ultimately. What you have to really think of is that, it's a necessary treatment for such a large population out there today and there's not really another option. It feels like they're on to something here. I would imagine there are a lot of larger companies in the healthcare space keeping a very close eye on them.

Chris Hill: We're going to stick with the theme of potential acquisitions because two weeks ago, Ricky Mulvey talked with Rick Munarriz about Celsius Holdings, which is a small cap energy drink maker. One of the questions he put to Munarriz was about whether Celsius could be in acquisition target for [Coca-Cola's] Coke or Pepsi. I'll paraphrase what Rick said, which was basically, "No, it's not Coke. But it might be Pepsi." Pepsi is a more likely candidate to take an interest in Celsius. That was in mid-July, cut to this morning's announcement that Pepsi has made a $550 million investment in Celsius, it represents about 8.5 percent of the company. I don't want to ascribe the ability to see the future to our friend Rick Munarriz, but he got this one right and this makes sense when you consider that energy drinks are one of the fastest-growing parts of the beverage industry.

Jason Moser: Yeah, they really are. You've seen a lot of growth in that industry over the last several year. Monster Beverage, of course, I think a lot of people are already familiar with that name. Celsius, I think they hold the number four spot currently in the energy drink space, but they're growing very quickly and I think that's part of the attraction there for Pepsi in this partnership that they've forged today. It's a great one I think for Celsius, because it really plays into that benefit. When we talk about companies like Coca-Cola or Pepsi, it's that distribution advantage. It's the immediate opportunity to plug into such a large network and get your product out almost everywhere instantly. That's something that's going to happen here with Celsius. It was obviously a very good thing. Pepsi, a nicely diversified business, when you look at the beverage side of the business, that represents about 30 percent of the company's overall revenue.

The North American beverage business was about $25 billion over the last 12 months, and that was about 30 percent of the overall business. Now when you compare that to the actual size of Celsius, you got Celsius with trailing 12 month revenue of $400 million and analyst estimates pegging it around $600 million for this full year. In the context of $25 billion beverage business for Pepsi, it's not that big of a deal for them today. In other words, it's a pretty easy, sensible bet to make. I think the only real question or eye-catching part of this is just the valuation that Celsius gets because it's not the most profitable business in the world. It's still very young, I guess is what I mean.

It's not to say that it's a challenging business, but the forecast of $600 million in revenue for the full year, and that translates ultimately to expectations for about 45 cents in earnings per share. You look at the share price today and that puts shares at 200 plus times earnings. It's understandable in the sense that the business is growing very fast. You can't take that away from them. When you look at this company's top line, it continues to grow at really impressive rates. I think that's because they've offered up a little bit of a differentiated product as it pertains to energy drinks. Whether that ultimately works, I just don't know. The energy drink space is an interesting one as we move away from sodas and toward alternative fizzy beverages. But clearly, they are onto something given that growth rate.

Chris Hill: It's not a cheap stock. [laughs] You can slice it a couple of different ways. This is not a cheap stock. But it does seem like this is a movie we've seen before, particularly with beverage companies. It doesn't mean that they're immune. We saw recently Coca-Cola, which over the past decade had taken an investment in Honest Tea, eventually acquired it, and then earlier this year announced, you know what, we're just shutting the entire thing down. We feel like we have more promising tea options in our portfolio. But it seems like it wouldn't be a shock if a year or two from now, we're talking about Pepsi just buying this company outright.

Jason Moser: Yeah, that seems like it could be a very natural progression after what to me seems like a very logical, sensible first step in the investment that they've made today. Again, placing a small bet, so to speak, on an idea with a lot of potential. A company with a large market cap, but still relatively small revenue. But again, that revenue growing very quickly. I think it really just boils down to, is this differentiated enough to where it attracts the masses? Is it going to be able to really nurture that same brand identity that other energy drinks in the space have been able to forge over the last several years? I guess that just remains to be seen. It's energy drinks but maybe a little bit healthier for you, and that sounds good on paper. But I think it really just ultimately has to translate to folks buying the stuff, and good news for them, it seems like a lot of folks are buying the stuff.

Chris Hill: Jason Moser, great talking to you. Thanks for being here.

Jason Moser: Thank you.

Chris Hill: Charlie Munger, the Vice Chairman of Berkshire Hathaway, once said, "I did not succeed in life by intelligence. I succeeded because I have a long attention span." Ricky Mulvey caught up with Asit Sharma to talk about how you can become a less distracted investor. They talked about one insurance company with a very sharp focus.

Ricky Mulvey: Today, we're talking mindfulness and investing and hopefully finding a couple companies with some focus. Joining us now is senior analyst and contributing learner to The Motley Fool, Asit Sharma. Asit, good to see you.

Asit Sharma: Ricky, always good to see you, man.

Ricky Mulvey: I've been thinking a lot about just distraction and focus lately in part because I love being distracted, we're working at home, but I also know that being distracted can make you worse at investing. I've been reading this book called Stolen Focus by Johann Hari, it's a great book, highly recommend it. It revolves around this thesis that our attentions were hijacked by tech companies and these distractions often involve terrible outcomes. Your attention is valuable real estate. Asit, you work on the virtual revolution. There are billions of these interruptions, distractions, every day. Tristan Harris, when he was at [Alphabet's] Google in 2013, Google was then sending out 11 billion interruptions per day. You have to think it's more now. I guess to start is, in the virtual revolution, does that just mean our phones are going to ding a whole lot more? Are we going to get even more distraction moving forward?

Asit Sharma: Yeah. Ricky, I work on a service indeed that tries to identify new economy opportunities. You're identifying a trade-off to some of this great tech, in that companies to make money need our attention and they're not shy about grabbing that attention. They're not shy about exploiting the many addictions that we have. Those dopamine hits to the pings, to the notifications, that little rush that we get when we check our mobile devices. Often it's tied to social media. Sometimes it can be an intrusive distraction we forgot about, which I'll talk about in a moment. But sure, this is something that we're contending with, but it's not absolutely a modern problem. If you go back centuries, great writers, essayists, novelists, poets from Montana have talked about this problem.

There's a really famous poem by Samuel Taylor Coleridge called Kubla Khan​​. Coleridge famously was interrupted in a flow state. He was composing this amazing poem, and it is quite amazing if you get a chance to read it, by a visitor, an unnamed person from Porlock who came in and interrupted him right as he was writing down this whole poem from memory that he'd composed in a dream state, Ricky, and he complained about this. Now, maybe he just had writer's block and didn't know how to continue the poem, there's a theory about that. But this is not a new problem. The difference is today that either well-meaning or ill-intentioned companies know how to press the buttons that pull us off that focus we so want to enjoy.

Ricky Mulvey: I think it's been hyper-charged to say the least. There are times I look at my phone now, and you can tell when I'm like, "I guess this tech platform needs a little bit more engagement." You have to have had that experience.

Asit Sharma: Yeah, for sure. For me, I'll give my quick story. I, during the pandemic, had downloaded the app from a smallish restaurant chain, a pretty good local joint, just for ease of use, just to be able to punch in an order. Two weeks later, it's the middle of the workday, I'm in a flow state, I get this buzz in my pocket, I pull it out, "We haven't seen you for a while." Come on. [laughs] It's been two weeks, I'm a new customer. Now, of course, the moral of the story is, I should have muted that upon installing the app because we know the ways to reduce these. That's my story. What about you? What's an alert or interruption that made you think cash? Does this really count?

Ricky Mulvey: For me, it's at this point it's Snapchat, which I use less and less. Like I'll put it this way. I'm not adding new people on Snapchat in this part of my journey on that platform. But it's still trying to pull me back. It'll tell me like, hey, this person that you had a class with in high school that you haven't communicated within 10 years has made a story and we thought that that needed to be on your lock screen with that alert. For me, that's where I've been considering, I haven't done it yet because I still like talking to my friends on there, but I've been thinking, I think I need to turn off the push notifications for this social media app. I will say though, I've you been back to the restaurant after it guilt trip to you? You left the story hanging. Much like a poet.

Asit Sharma: Look, like everyone else in modern life I have a semi-addictive personality so nonetheless, I went back.

Ricky Mulvey: If you've made it through this much of the B segment, which thanks you for hanging out with us through poetry distraction. Let's think about some companies that have a clear focus because I think it is very easy. You see companies getting distracted with sometimes overpaying for acquisitions, different corporate strategies, whatever you want to call it. When you think of a company with a very clear focus, well, what do you think of? Because I'll give you mine, but it's not necessarily for the right reasons.

Asit Sharma: The company that comes to my mind, Ricky is Kinsale Capital. It's a smallish insurance company we have in many portfolios at The Motley Fool. It plays its trade in something called the excess and surplus market. This is like specialized insurance. Think of a tattoo parlor on the edge of town in a town that seen better economic days. Who's going to ensure that puppy? Not the big insurers who are focused on what's called the big admitted market. It takes a certain amount of focus to be able to underwrite this insurance profitably and Kinsale is very good at this. They have subject matter experts that focus on different lines. They don't try to expand into other parts of the insurance market, even though this is one of the most fragmented markets in the world and it's so tempting to add on revenue. Look, let's just get into X-Line. We can increase revenue by 10 percent next year. They've always taken the harder way, which has turned out to be very profitable for this company. It's helped them grow sustainably. They go about in their part of the insurance world using data analytics, having great loss ratios so they underwrite risk in a sustainable fashion. They keep control of their operating expenses. There closely held, all the things you'd like to see, and they're growing at a really fast rate. Thirty-six percent compounded annual growth rate over the last three years. This is what focus can do for you if only we could bring ourselves to focus.

Ricky Mulvey: What niche are you talking about when you say they have like a specialty niche in insurance underwriting?

Asit Sharma: They're part of the market has a perceived higher-risk, this E&S market or excess and surplus market. It really is a very small part of the vast trillion-plus dollar industry that is global insurance, so when you're focusing on a market that's only in, let's say the tens of billions, it takes a certain amount of discipline to keep within that market. You could go laterally into a part of the market that might be worth hundreds of billions for you if you got into let's say life insurance. But Kinsale focuses on specialty risks underwriting. I think this is a model that many other companies would do well to follow.

Ricky Mulvey: Like scuba diving, tattoos, cigarettes, dirt bikes, risky activities?

Asit Sharma: Yes, in some ways, that's true. Mostly focused on corporate activities. I think you've described the picture pretty well.

Ricky Mulvey: For me and my company with a lot of focus right now is for the wrong reasons and that would be MicroStrategy. CEO Michael Saylor has made extraordinarily clear that he would like to use his company to buy more Bitcoin and focused for the wrong reasons but hey, there is a focus there [laughs] so had to give a shout out. Not just companies though, as we talked about focus and distraction. What are some practices you really like, that is, helped make you more mindful, whether it's just in your life or as an investor?

Asit Sharma: My colleagues, Tim Beyers, Brian Stoffel and myself have a show for Motley Fool subscribers every week. It's the Mindset Hour. Now it's changing to the mindset half-hour. We're always preaching to put distance between stimulus and response in our mindset sessions. This is more about emotions. When a down-market, a bad market is driving you to frustration, and driving you to angst and one day you just open up your laptop and you start hitting sell. We always say look, take a pause between that stimulus and your action. One example of this is maybe imposing a rule that I'm not going to sell or buy any stocks until I've had one Saturday between the urge, I'll sit down with a cup of coffee for an hour, I'll think through my plan. I'll do some research and then I'll make a decision. I think this piece of advice that we're always trying to push out also works for focus and avoiding distraction. If we could all just celebrate the pause, find some time that we can block off everything. Not just digital and technologically oriented distractions, but analog ones too even friends, loved ones, just how some time alone in a space where we're not going to be bothered. I think this could be a good strategy for those who are suffering from too much lack of focus and too much distraction.

Ricky Mulvey: Before I turn my notifications off and go out for a walk, what are some distractions you're welcoming right now?

Asit Sharma: Briefly for me, although I could name probably six or seven. I'm not good at any of them. I think reading novels, and writing in my journals because both of those activities stretch timeout for me. I lose track of time I get in that flows state and then I feel better for it afterward. Instead, time getting compressed, it expands a little bit. How about you Ricky?

Ricky Mulvey: Healthy distraction will not lately, but I pick up basketball. That for me is when I can enter a flow state of not really worrying about the world around me, but just I have a ball and I have an enemy and it's great. Then let's just say the less healthy one, there's a phenomenal show on Hulu right now called The Bare about this restaurant environment and it brought me back to the feeling I had when I watched The Sopranos for the first time of that like very real visceral slice of life story and I absolutely love it.

Asit Sharma: Man, I have to check that out.

Ricky Mulvey: Asit, see you soon and thanks for joining us.

Asit Sharma: Thanks so much Ricky, this was a lot of fun.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against them, so don't buy yourselves stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.