Focusing on a stock's short-term price movements is a losing game, and it's often the case that big dips or jumps have nothing to do with a company's chances of future success.
For example, over the last month, shares of Cue Health (HLTH) have fallen by nearly 38% despite reporting strong earnings on March 29. What gives? As it turns out, there is a probable cause for this crash, but it shouldn't change anyone's investment thesis on this stock. Here's why.
What does Cue do?
Cue is in the at-home coronavirus diagnostic testing business, but it doesn't make the antigen tests that have become so popular over the last year. Instead, it makes a small handheld device that runs swab-based samples just like a PCR machine used in clinical laboratories. In other words, customers can get the diagnostic capabilities of a molecular test without needing to go to a specialized testing center.
To use the system, customers need to buy disposable test cartridges that contain the appropriate swab. Then, they just pop the cartridge into the device and let it figure out the rest. Cue's unit is faster than typical PCR tests, too, and the turnaround time for people to get their results can be as short as 20 minutes. And, since the results are logged and conveyed through the company's smartphone app, it's a very favorable option for people who need to get tested frequently.
For the moment, it's thinly profitable, but its revenue growth is positively bonkers. In 2021, it brought in $618.1 million in revenue, whereas it had sales of only $23 million in 2020. Still, if the pandemic recedes faster than expected, it'll be an issue for this business.
For now, coronavirus testing is Cue's focus. Still, it has plans to develop new types of cartridges that might be used for different diagnostic purposes, ranging from pregnancy testing to influenza and even cholesterol. It's debatable how frequently an average consumer might actually need to test themselves and buy new cartridges, but management thinks that the size of the addressable market is around $10 billion per year. Plus, the company's analyzer could be used in pharmacies, doctor's offices, airports, and other point-of-care situations, which could be worth $20 billion per year.
In particular, the U.S. department of Health and Human Services and the Department of Defense have both taken an interest in Cue's main product, purchasing 30,000 devices and roughly 6 million test cartridges. That bodes well, as each device sold to these large organizations implies a stream of recurring revenue generated from cartridge sales.
Why'd it drop?
Now that we're up to speed on Cue's business model, we can look at the recent price movements with a bit more clarity.
Since going public in late September 2021, Cue's shares are down by around 68%, despite experiencing a few days of shooting wildly higher in the tail end of last year. Amid the market turbulence, geopolitical uncertainty, and widespread decline in young growth stocks in that period, it's safe to say that at least some of that decline is external to Cue's ability to compete.
Furthermore, the sell-off starting March 22 may be the result of company insiders exiting their positions for the first time they are eligible to do so under the terms of the initial public offering (IPO), which dictated a lock-up period of 180 days starting from the initiation of trading in late September 2021. Cue's prospects aren't harmed whatsoever by insiders deciding to sell.
However, the recent dip might also be a reaction to the company's March 22 announcement that it was going to team up with Albertsons Companies to offer in-pharmacy coronavirus testing using Cue's hardware.(ACI 0.70%)
If the market is judging coronavirus testing to be a fading market segment rather than a growth segment, it makes sense why Cue's continued expansion isn't being recieved as positive news. After all, Cue's method is on the expensive side in terms of its product gross margin, which is near 46%, and so sales growth will be hard to translate into earnings in the near-term. But, establishing its devices in a national pharmacy chain will leave the door open for higher-margin growth down the line, when there will be a larger collection of tests for consumers to choose from.
In sum, long-term investors shouldn't care too much about Cue's recent dip for now, though it does signal that it might take a few more years for the company's most lucrative plans to take off.