Contrarian investing is fun because when you nail a contrarian pick correctly, you get the joy of saying "I told you so!" Seeing the value in opportunities that other investors discard means capturing outsized profits when things go right.
There just might be such an opportunity in Nano-X Imaging, (NNOX -1.26%) a medical-device business that's survived allegations of fraud and a brutal decline of almost 70% in the past year. If you're brave enough to roll the dice on odds that other people consider long, read on.
NASDAQ: NNOX
Key Data Points
Why this stock is controversial
Nano-X's product in development is the Nanox.ARC, an X-ray imaging device that's significantly less expensive to operate than traditional X-ray machines used in hospitals worldwide thanks to its innovative low-cost X-ray tubes. Rather than selling the device as a unit and then charging customers for maintenance and replacement parts, it hopes to charge a fee for every time its platform is used.
The idea is that when paired with the company's artificial intelligence (AI) software package, remote clinics in economically disadvantaged areas that might not have enough money for an X-ray machine or a radiologist can use the Nanox.ARC and pay Nano-X for each scan they perform. So far, it only reported about $3.1 million in trailing-12-month revenue, though it has $73.7 million in cash and marketable securities on its balance sheet and a negligible amount of debt.
Though the U.S. isn't exactly the company's target market, it's still applying for regulatory approval for the Nanox.ARC. The version of the device with a single X-ray source is already approved by the Food and Drug Administration (FDA), but the application for the multiple X-ray source version, which is intended to be the main production model for global sales due to its broader capabilities, is still pending. In fact, it's controversial whether the device is functional at all -- and if it isn't, investors will be left holding the bag.
In late 2020, the short-selling group Citron Research published a report alleging that the company's claims about the capabilities of its technology were unfounded and even fraudulent. Nano-X would successfully demonstrate that its device worked in a live demonstration a couple of months later, and it subsequently began to ship the first units in Q4 of 2021, so in retrospect, the objections seem disproven. But, other allegations -- such as the company's list of customers contained fraudulent entities that would have no legitimate reason to order Nanox.ARC units -- are a bit harder to dismiss.
Now might be the time to make a contrarian bet
The brutal drop in its share price aside, there is reason to believe that Nano-X has actually secured real customers who will soon start to deliver the company significant revenue as they begin to utilize the devices in their clinics. In late 2021, it agreed to send 350 Nanox.ARCs to a medical device distributor called the International Clinics Group in South America, which serves Peru, Bolivia, and Chile. The International Clinics Group is an operating (and private) company based in Chile. But its annual revenue of just over $7.1 million means it would struggle to afford traditional X-ray technology in the numbers it hopes to procure from Nano-X, thereby making it a natural fit for the pay-per-scan model.
Therefore, it also makes sense that the company recently opened a new manufacturing facility in South Korea to produce chips for the Nanox.ARC, with the goal of reaching full-speed production by mid-2022. That means the company soon will be able to market its product more aggressively worldwide. And, lest investors forget, it won't take much in new sales to make its measly revenue multiply in size.
When factoring in the stock's long decline and the remaining taint of a controversy, the stars are aligned for daring investors to make a profit from the market's excessively low expectations. Of course, the risk of potential customers not appreciating the benefits of a pay-per-scan model could be a barrier to widespread adoption, and key regulatory hurdles remain. So, if you're looking for a safe purchase, look elsewhere.
