With its share price down 56% in the past 12 months, STAAR Surgical's (STAA -0.65%) stock has clearly seen better days. Judging by its collapse, it'd be reasonable to assume the implantable lens company is facing major headwinds -- but it isn't. In fact, there's not much standing in the way of its continued growth over time.
So is there another issue that should dissuade investors from approaching this stock? Perhaps, but rumors of STAAR's rolling demise are quite overblown, and here's why.
Things are going according to plan
The first thing to know about STAAR Surgical is that it sells implantable refractive lenses for vision correction.
That means it competes with laser vision-correction surgery as well as more mundane products like glasses and contact lenses. As you might have guessed, the advantage of having vision correction in an implantable format is that there's none of the hassle associated with cleaning smudged lenses or dealing with dry eyes after wearing contacts for too long.
There's no shortage of people needing vision correction. Right now, there are at least 90 million people worldwide that fall within STAAR's target market, and the company has a market share of around 9% globally. In 2021, selling implantable lenses to those people brought it $230.4 million in revenue, but that's likely just the start. Management is banking on making around $295 million in 2022, and even more beyond this year.
By 2050, the company estimates that more than 50% of the global population will be myopic, meaning that they'll need help to see things that are far away, which will make its market even larger.
The catch is that (thankfully) nearsightedness isn't exactly going viral, despite becoming more prevalent over time. In other words, penetrating the market faster than the market's base rate of growth is more likely to be a marathon than a sprint. See below:
As you can see, STAAR's annual revenue growth over the past five years hasn't been too shabby, but it hasn't been very rapid either. Given the ongoing, strong uptake of its implantable lenses in major markets like China and Japan, it's reasonable to expect similar rates of growth over the next few years.
Plus, the U.S. Food and Drug Administration (FDA) just approved one of STAAR's next-generation lenses for sale, which is sure to deliver even more growth. And assuming total expenses continue their slow decline as a share of sales, investors can also expect to see earnings continue to rise at a rapid pace, and expanding margins are plausible too.
Furthermore, the company's debt load of near $32 million is negligible, given 2021's free cash flow (FCF) in excess of $30.3 million.
A bloated valuation is a challenge right now
So STAAR Surgical is very far from being doomed. The only issue is that investors are going to need to pay a hefty toll to own this stock. Consider the following:
As you can see, the stock's valuation has taken quite a parabolic trajectory over the last three years. But even after its sharp decline in recent months, it's still very pricey with a price-to-earnings (P/E) multiple of 120 and price-to-book (P/B) multiple of about 11.
By contrast, the medical equipment industry's average P/E multiple is close to 49 and its average P/B multiple is nearly 6.9. That doesn't mean the stock isn't worth buying, but it does mean that there's an ongoing valuation risk.
If investors know that they can get similar earnings growth with another stock while paying significantly less for the privilege, they might even sell their shares. And at its current valuation, it wouldn't be too surprising to hear that value investors are staying far away from STAAR Surgical.
Nonetheless, in the long-term, the stock's valuation won't matter as much as the company's ability to keep efficiently penetrating the global market as it expands. Therefore, while I wouldn't be comfortable with buying STAAR at its current price, it's probably going to be a lucrative company to own over the next decade and beyond.