Shockwave Medical (SWAV -1.15%) has been a Wall Street darling since it hit the public markets in March 2019. The share price more than tripled in the months following the IPO as more investors learn about the incredible growth opportunity ahead of this business.
In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi take a closer look at Shockwave Medical's technology, market opportunity, and financial statements and give their opinion on what it could mean for investors.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on June 5, 2019.
Shannon Jones: Let's turn our attention to the company most people likely have not heard about, but I can tell you, it has been buzzing around the hallways here at Fool HQ. I've heard so much about this company. It's been on my list to actually do a show with you, Brian, on this company. That company is none other than Shockwave Medical, SWAV. Brian, despite its performance since it debuted on the market, this really still is a company that just hasn't gotten enough investor attention, investor love, I think. What can you tell us about its debut on the market a little bit earlier this year, and why you became interested in the stock?
Brian Feroldi: That makes sense. For our listeners, this is a company that came public in March of this year. That is right at the time when Pinterest, Lyft, Uber, Beyond Meat -- I mean, we've been spoiled with the number of IPOs we have. It makes complete sense how this company, which should have gotten a little bit more fanfare, has been just kind of brushed aside. But this company has been just red hot. The IPO priced at $17, which was above their range. They're currently trading about $58. So this has been a triple since it came public.
To answer your question, the reason that this company was on my radar at all was because another medical device company that I deeply admire, Abiomed, we've talked about them on the show before, they actually took an equity position in this company prior to its IPO. They also helped get the IPO going. These two businesses are now working together. So, getting the thumbs up from a proven market winner like Abiomed was a big vote of confidence for this company in my book.
Jones: Let's talk about their tech. What's amazing to me with Shockwave Medical is not necessarily that they invented something new. Rather, they took two different types of tech, put it together as one, and they've had some pretty astonishing results, to say the least. What can you tell us about how their tech works, and particularly how it can address many of the needs related to heart disease?
Feroldi: Shockwave is focused on the cardiovascular disease market. They sell an intravascular system that makes use of a technology that has been around for decades called lithotripsy. Millions of people in America and around the world have developed fatty deposits in their arteries. That can cause all kinds of problems, it restricts blood flow and doesn't allow blood to circulate around the body. So, when this happens, a very common procedure is to huge angioplasty, which is when a tiny balloon is inserted through a catheter into the blocked artery, and then it's inflated to widen the artery at the point of the blockage and restore blood flow. Now, that technology has been around for a long time. It works very well. However, in about 30% of cases, the plaque that's blocking the artery becomes calcified, so it becomes basically rock-hard. In those situations, normal balloons don't work, so doctors have to use either very high-pressure balloons, or they even insert balloons that have blades in them to literally cut out, to score, the inside of the arteries, to relieve the extreme pressure from that calcium. And in very tough cases, in very blocked cases, where the calcium is just everywhere, they actually use a miniaturized drill to be inserted into the artery to literally drill out the calcium. As you can imagine, using scoring and a drill can be very risky. Not only can it damage the artery wall, but it can also cause debris and the calcium to be shed out and go into the bloodstream, and that can cause problems for the patient both upstream and downstream.
Shockwave has an innovative solution here. They use a technology called lithotripsy, which has been used to break apart kidney stones for decades in patients. What they do is, they developed a device that is inserted with a balloon directly into the impacted artery. Then the device creates small sonic waves that actually break up the calcium deposits in the hardened arteries while leaving all the soft tissue that's around it unharmed. These sonic waves actually break up the calcium and allow blood flow to be restored in a much safer manner.
Jones: I think we should retitle this show All About Physics. That's really the simplicity of physics. I mean, you're talking about sonic waves; you're talking about, with Novocure, electricity. It's amazing to me, the simplicity of tech that's already out there, is now being applied in an innovative way for just huge need. Sometimes it's not about the expensive gene therapy that costs over $1 billion. Anyway, it comes down to the simplicity of technology, and that's what this company is all about. But really, it's their business model that also is really intriguing because they've got some reoccurring revenue streams that are built in as well.
Feroldi: Yeah. Shockwave basically sells three devices. They sell the device itself, which is the lithotripsy generator, which is about the size of an Xbox. It plugs right into the wall. That connects to a connector cable that powers the actual catheter. And then Shockwave also sells the disposable catheter as well. This company is still pretty small from the revenue standpoint, but down the road, as those catheters get used more and more, they are disposed of after each treatment. So the business model will have a recurring revenue component built into it over time. That makes me excited as an investor.
And to quickly put some numbers behind what this company has done, still very, very early on here in the stage. Last year, the total revenue for the full year was just over $12 million. Thankfully, that number is growing extremely quickly as more and more providers grow used to this technology. Last quarter, their revenue actually jumped 450% to over $7 million. They expect revenue for the full year to just about triple over 2018. So, growing very fast.
Jones: I've seen some analysts pegging Shockwave's top line potentially surpassing $250 million by 2023, about a 20-fold increase over the next four to five years. Brian, where is this coming from?
Feroldi: The big thing for investors to look at with any new technology is, OK, what's the potential here? Where they could be at the end is hopefully much bigger than where they are right now. They currently have regulatory approval to treat peripheral artery disease with this device, which is when blood flow is restricted in the limbs, usually in the leg. They have approval for this both in the U.S. and in Europe. Management pegs that opportunity there at about a $1.7 billion market.
Now, a couple of other indications down the road could expand that number significantly. Right now, they do have the approval in Europe to treat coronary artery disease, which is the arteries that supply the heart with blood. You can use Shockwave's device on that in Europe. And they are currently marching down the path to get the approval there in the U.S., too. If everything goes well there, that could be another $2 billion opportunity for the business.
And then, finally, another area that they think that this technology can be applied to is a treatment for aortic stenosis, which is, the heart valves themselves, when they become calcified. The heart valves can become narrowed and obstruct blood flow. And if they can win approval for that indication, that would add another $3 billion market on top of everything we already talked about. So, the numbers here could be huge in time.
Jones: Shockwave right now is trading at about $58 a share. It has a market cap of about $1.6 billion. Brian, on the one hand, I think, as an investor, this is insanely expensive, especially looking at the revenues that you just mentioned earlier. On the other hand, though, you laid out the case for the total addressable market, which is key for any investor to be aware of. I mean, just in those indications alone, even if they only capture a small percentage of those therapeutic indications moving forward, I have to step back and think now could actually be the best time to get in on this stock, especially ahead of those multi-billion-dollar indications.
Feroldi: Yeah, there's no doubt that buying this stock today is a bitter pill to swallow. I mean, like you said, revenue is expected to be about $33-36 million for the full year, and they're trading at $1.6 billion. Literally 50X full-year revenue estimates. That is an enormous premium. But, like we talked about, it makes sense why Wall Street has such high hopes for this business. Not only are they going down a potentially huge market, but they're already showing extremely fast growth. When Wall Street gets excited like that, stocks can just soar.
The thing for investors to know is that this is going to be a volatile stock. I mean, this is priced at such a high value that investors can expect huge swings up and down. If you are interested in this stock, and you get to know it, we always recommend buying in thirds -- taking an initial position and then building it out over time as you see the company go along. But from what I've seen, I totally understand why Wall Street is very excited about this business.
Jones: A lot to like here, but with volatility, not for the faint of heart. Starter position may be the way to go with this particular company.