Shares of TransEnterix (ASXC -1.19%) were jumping by 6.7% as of 3:30 p.m. EDT on Tuesday after climbing more than 14% earlier in the day. The nice gain for the robotic surgical systems maker came after BTIG analyst Sean Lavin upgraded the stock from a neutral rating to a buy rating. Lavin also gave a price target of $3 per share for TransEnterix, reflecting a premium of 136% over the stock's closing price on Monday.
The important thing for investors to understand when an analyst upgrades a stock is the reason behind the optimistic outlook. In this case, BTIG's Lavin felt that the sell-off of TransEnterix last Friday following a disappointing first-quarter earnings report was overdone.
TransEnterix reported much-lower sales in the first quarter than expected. However, the company's CEO, Todd Pope, stated in the Q1 conference call that all of the sales that TransEnterix is targeting "remain opportunities." Lavin agreed, writing to investors that TransEnterix could post stronger results in the Q2 and following quarters.
The sales cycle is taking longer than TransEnterix anticipated. Pope acknowledged this, saying that the process of converting surgeon interest in the Senhance robotic surgical systems into an order from hospital administration takes longer than expected.
TransEnterix also faces a challenge with Intuitive Surgical's focus on offering leases to customers for its da Vinci surgical system. Leasing lowers the up-front cost for obtaining da Vinci and has proven to be a smart business strategy for Intuitive.
Investors should be cautious about relying on any analyst's rosy forecast for a company. But it does seem likely that TransEnterix's revenue will improve in future quarters.
However, TransEnterix ended the first quarter with a cash position of only $48.4 million. That, along with its debt proceeds, should be enough to fund operations into late 2020. But there's a real possibility that the company might need to raise additional cash through a secondary offering within the next year or so. In that case, dilution in the value of existing shares could lie ahead for TransEnterix.