What happened
In a highly volatile session, shares of the medical device business ShockWave Medical (SWAV) tumbled by more than 12.2% as of 3:20 p.m. ET Tuesday, likely as a result of tremendous uncertainty throughout the market during the run-up to the Federal Reserve's decision about hiking interest rates anticipated on Wednesday. The Fed's hikes will increase the cost of borrowing, and thus potentially starve the company for fuel it could use to expand.
At the same time, the instability of the market and the economy makes stocks with bloated valuations look less appealing relative to those that are well grounded. The company's price-to-earnings (P/E) ratio is just over 200, which is sky-high in comparison to the medical device industry's average P/E of close to 42. Investors may be dumping shares of their overvalued holdings, contributing to the stock's fall.
So what
Though ShockWave is profitable and rapidly growing its revenue, it only generated around $29 million in trailing-12-month net income, whereas its TTM operating expenses eclipsed $220.4 million and its cash holdings were around $201.1 million.
In other words, it might need to borrow money in the near future. And that makes the Fed's highly probable decision to raise interest rates even further on Wednesday into a larger future cost.
Now what
Next quarter's earnings report, which is due in early August, will clarify whether ShockWave's margins are improving enough to abrogate the need for borrowing. If its margins continue to improve at the same pace they did last year, the stock might shoot up as the market prices in the decreased chance of it needing to take out a loan.
