Should Investors Consider Sight Sciences Stock?

Sight Sciences (SGHT -8.27%) only recently made its public debut. Since the company's initial public offering last summer, shares have plunged by nearly 50%. Now, it's not uncommon for newly public companies to see shares plunge, even after a strong entrance to the market. Is this company, which markets medical devices to treat diseases of the eye, one that investors should put on their watch list right now? In this segment of Backstage Pass, recorded on Dec. 13, Fool contributors Asit Sharma, Jason Hall, and Rachel Warren discuss.  

Asit Sharma: Let's take a look at the balance sheet first. Just to know that because of their public offering, they've got plenty of cash on their books. They do have $32 million in long-term debt. But if you subtract these numbers, as you guys know, I always look at working capital, so let's call it $287 million when we take out this $10 million and then take out another $32 million. There's plenty of cash on the books, but they'll need it because they do have this loss run rate. I will just go to the statement of cash flows first.

You can see this is not one of those software-as-a-service companies where you start with negative margin and you add up to positive cash flow, at least not yet. The company burned through $42 million of cash in the first nine months of this year.

However, with that $240 million odd of cash on the books, they have a long runway. I do believe that we'll see the financials improve a bit. We should look at the nine months' income statement. You can see here, this is that high gross profit that I talked about on sales of $34 million in the nine months ended Sept. 30, 2021.

They had gross profit of roughly $28 million. Right now, selling expenses are the biggest expense they've got on their books as they build out that direct-sales force. And they even have a small global team that's being developed mostly based in the U.S. for now.

But over time, if this model keeps moving in the right direction, we will see these numbers start to normalize. And at some point, we should be able to see positive cash flow or the path to it.

Again, follow for me of about four quarters. But if the story gets more interesting, I would be back on this show sometime next year to talk more about the stock.

Jason Hall: So, Asit, I look at a business like this and two things come to mind. You think about the upside is being, what's the name of the robotic surgical company?

Asit Sharma: Yeah, Intuitive Surgical.

Jason Hall: Intuitive. Being a mini Intuitive Surgical, breaking into this industry that doesn't necessarily have a lot of these advanced tools at this point.

Because it is a very high-margin industry when they get to scale. But that's the challenge: Getting to scale and things that we've learned like DermTech for example, has a disruptive product.

They're really struggling to get the physicians in their industry -- dermatologists in this case -- to take up their products.

The challenge here is for them to have their sales staff do the same thing, is to get doctors to change, to try the product. Then the growth can take off. Once it starts to become more of an industry standard.

Asit Sharma: Totally, Jason. I think that's the magic and that's what we don't know. It's a relatively young company and we haven't seen them perform much as a public company, making promises, executing on those promises? How will this sales force perform? How competent is management?

They've got a great board with a lot of industry experts in the vision industry. But the proof is in the pudding, so we have to watch this and see if it seems like they are gaining traction. And there are ways to get a few layers deeper into the onion as they go along. Then it becomes a more interesting story.

But why am I not bringing this as I might usually bring a company, like a software company, and say: "Hey guys, I love this, I'm an owner. Look at these margins, look at this growth, look at this cash flow." Because in this industry, those have to be built over time, and you have to be patient.

Of course, you can always take a little peanut-shell position to keep your interest in a company like this. I don't hold a position yet. I might in the coming quarters.

Jason Hall: Rachel, you cover the healthcare industry. Software enterprises: they try stuff out all the time. They'll sign up for a software-as-a-service, they'll give it a try, test it in a department, that kind of stuff. Doctors are far less likely to take on new products and take on the risk with their patients.

Rachel Warren: It's true and I'm actually really glad that Asit brought this company to the table because as you said, I cover a lot of healthcare companies and I have not heard of this one.

One of my favorite stocks of all time that I talked about too often to take a position in [laughs] is Intuitive Surgical. I just haven't seen a lot of other companies within the broader medical-devices space that have piqued my interest.

Just looking at this one and how new it is in the publicly traded space and still what a good job it's doing of growing its revenue, expanding those margins, I think it's definitely one to watch. And it's one that I'm now putting on my radar.