The crack of the bat. The roar of the ocean and the surrounding seagulls. A crackling fire. Family dinner conversations. According to innovative hearing aid maker Eargo's (NASDAQ:EAR) most recent investor presentation, 43 million Americans have hearing loss and may have difficulty with these beloved sounds, yet only 27% of them have a hearing aid. Despite such low market penetration, over $8 billion was spent on hearing aids in the U.S. in 2019.

Eargo is seeking to disrupt and modernize the market with its sleek, virtually invisible, inside-the-ear hearing aids. Management believes that if it can decrease the stigma of visible hearing aids and offer a more comfortable option for patients, the company can expand the market, taking a growing share of what it believes to be a potential $30 billion pie in the U.S. alone. Capturing just a fraction of this opportunity would make Eargo's $2.3 billion market cap soar.

EARGO IS HELPING MORE CUSTOMERS HEAR LIFE TO THE FULLEST.

IMAGE SOURCE: GETTY IMAGES.

What sets Eargo apart?

Eargo is a more comfortable, less visible option than traditional hearing aids; it offers rechargeable batteries and can be had at a significant discount to "regular" hearing aids. Management says the average hearing aid will set a patient back about $4,600, while Eargo's models range from $1,850-$2,950.

It's also easier to get an Eargo. Traditionally, patients would need an audiology referral, a hearing test, a fitting appointment, and further follow-up appointments for adjustments, but with Eargo's online model, they can have a consultation, make a purchase, and enjoy unlimited telehealth support and personalization almost immediately. This allows patients to get back to hearing the dinner party conversation in as few as three days, compared with weeks to months the traditional way.

How do the numbers sound? 

For all of fiscal 2020, which ended Dec. 31, the company reported net revenue of $69.2 million, up about 111% year over year, with full-year gross shipments up about 68% and margins at a juicy 70.8%. This triple-digit growth makes for a tough comparison going forward, and management expects first quarter 2021 net revenue to be down sequentially after some Q1 2021 sales were pulled forward into Q4 2020. Eargo is guiding for full-year 2021 net revenue of between $87 million and $93 million, representing only a 30% increase at the midpoint. That equates to a projected forward price-to-sales ratio of 25.5. That is quite a bit more than hearing aid industry leader Sonova Holding (OTC:SONV.Y) and its P/S of 6, although Sonova's margins are significantly lower at 13% versus Eargo's 70%.

Eargo's non-GAAP net operating loss for fourth quarter 2020 was $7.2 million, much less than the $12.6 million loss in Q4 2019. And Eargo is flush with cash, with $212.2 million on the books as of Dec. 31. It posted a net loss in Q4 2020 of $11.8 million, compared to a net loss of $13.4 million in Q4 2019, spending about $4 million on R&D in each quarter. Finally, the percentage of products returned by customers improved, from 34% in Q4 2019 to 24.4% in Q4 2020. If Eargo can continue to improve that metric to get closer to the industry average in the high teens, another fruitful quarter may be inevitable.

A little bit louder now

Its forward P/S ratio may be higher than some, but Eargo has earned it. The company has plenty of runway for growth, lots of competitive advantages, and juicy margins. If it can improve on its customer return rate while retaining its margins and growth, long-term investors who add Eargo to their healthcare baskets may be the ones smiling from ear to ear. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.