Shockwave Medical (SWAV 0.10%) and Butterfly Network (BFLY -4.72%) are medical technology companies on the bleeding edge, improving the way healthcare is provided every day. While both are guiding for over 55% revenue growth year over year, Shockwave is down 2% since the start of 2021, while Butterfly is down nearly 24%.
Shockwave utilizes -- you guessed it -- shockwaves -- to break up calcium deposits inside blood vessels throughout the body with its device and catheters. This procedure, dubbed intravascular lithotripsy, enables the size of blood vessels to be expanded beyond current treatments which, in theory, enables better outcomes. The company's catchphrase is, "We crack calcium." Butterfly makes a handheld ultrasound machine that plugs into your smartphone, and costs a fraction of the price of regular ultrasound machines. The company enjoys a following among their users that is strikingly similar to fans of Apple or Tesla. So which is the better buy now?
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Unleash growth mode
This is a story of two companies in growth mode with slightly different approaches. Butterfly sells the hardware (ultrasound probes) as well as an annual subscription service that enables users to save their images and thus bill for their work. Shockwave utilizes more of a razor-and-blade model, selling single-use catheters that are higher-margin (you need at least one new catheter for every procedure, and sometimes multiple catheters per procedure), as well as the equipment the catheters connect to in order to get the power needed to crack that calcium. Gross margin is currently at 43% for Butterfly, with a goal of 70% over the coming years, whereas Shockwave is already at 72% gross margin. The edge for margins goes to Shockwave.
Land and expand
Both Butterfly and Shockwave already have platforms that the companies are eager to leverage and expand upon, yet both need to increase their install base a bit more. Butterfly has sold over 20,000 units worldwide in 2020, selling 56% more units than the previous year, and is guiding for 77% revenue growth in fiscal 2021 (guiding for $78.1 million) and an additional 77% growth on top of that in fiscal 2022 (to $137.9 million). While Butterfly believes the ultrasound market is a $6 billion market, it also believes that only 3% of the ultrasound market is currently going to handheld machines, and that 3% does not include subscription services. Shockwave, on the other hand, has not really broken out the install base, but it does believe its total addressable market worldwide to also be $6 billion. Shockwave saw revenue grow by 58% to $67.8 million from fiscal 2019 to fiscal 2020.
The big question is: At what point does Butterfly hit a ceiling? While I do not know the answer, I do know that competition for the handheld market is getting interesting, with new players regularly trying to break into the field, and established players like GE and Philips updating their devices. That said, there are over 40 million healthcare providers worldwide, so the game is likely big enough for multiple players. While Shockwave may have some competition from stent makers, there is really no foreseeable competition to its calcium-cracking intravascular lithotripsy devices. Even though Shockwave seemingly has a market to itself, Butterfly is growing revenue faster and provides more clarity for investors. Butterfly wins the revenue growth game.
The tale of two $6 billion dollar markets
Shockwave is currently marketed for cracking calcium in badly calcified arteries in the legs, kidney stones, and -- the biggest and newest market for them to date -- coronary vessels that cause heart disease. While the coronary calcium market has significant potential, it represents about $4 billion of the company's estimated $6 billion total addressable market. If the newly approved coronary disease market underperforms, it could spell trouble for Shockwave. Butterfly, on the other hand, is already selling its probes like hot cakes in the $6 billion ultrasound market, and has a cult-like following.
The big wildcard here is the at-home market, where Butterfly is seemingly looking to eventually partner with primary care doctors and cardiologists to monitor heart failure patients at home -- among other things. These services are not expected to be released until at least 2023, but they represent a potential high-growth area for the company. Since Butterfly has already demonstrated success in its $6 billion market and has a trick up its sleeve for future growth in the at-home market, Butterfly wins this round.
The winner: Butterfly
This was a tough decision, as both companies are primed for growth for the foreseeable future and will likely make good investments for patient investors. A lot more has to go right for Shockwave and its current eye-popping 63 price-to-sales ratio (P/S) in order to reward today's investor. Butterfly and its sub-20 P/S ratio, on the other hand, has already demonstrated success in its market, and is already growing margins to work toward its goal of 70% gross margin. While I do not think you can go wrong with either company in the long term, I think Butterfly is the less risky of the two and is more likely to outpace the rewards of Shockwave at today's prices.
