If you've been looking for growth stocks with explosive potential, you've probably noticed that a company called TransMedics Group (TMDX 0.45%) has practically tripled over the past 12 months.
TransMedics recently reported outstanding results from the first quarter, but the stock has slipped. A stock price drop of around 8% despite total sales that rocketed higher has a lot of investors scratching their heads.
To find out if TransMedics is a buy on the dip, let's take a closer look at what the company does and where it's headed.
A niche ripe for disruption
You probably already know that there aren't enough transplantable organs to meet demand. There are currently more than 104,000 Americans on the national transplant waiting list, and 17 die each day while waiting in line for an organ that never comes.
A lack of donations is only part of the problem. Standard postretrieval procedures that often involve little more than a cooler filled with ice are a bigger part.
The TransMedics Organ Care System (OCS) is a vast improvement over standard procedures -- it keeps organs fresh by pumping them full of warm oxygenated blood. The company's National OCS Program is an end-to-end service for retrieving and transporting organs. Transplant centers hire TransMedics so they can focus on patient care.
The National OCS Program is so popular that transplant centers are beating a path to TransMedics' door. First-quarter revenue rose 162% year over year to $41.6 million, and transplant centers' use of the National OCS Program was responsible for 91% of U.S. OCS sales.
The company's expectations for total revenue in 2023 imply growth of between 71% and 82%. That's a lofty prediction, but I wouldn't be surprised if the company is actually underestimating future demand for its National OCS Program. America's organ-sharing system is in the middle of some big changes.
For nearly four decades, a nonprofit organization called the United Network for Organ Sharing (UNOS) has held a monopoly on America's organ transplant system. In March, the government agency responsible for overseeing the network proposed breaking up responsibility for its functions, citing poor performance.
TransMedics' organ-care system is approved by the FDA to handle hearts, lungs, and livers. It's the only company with an organ-care system approved to maintain and transport multiple organs.
The business recently recruited a senior logistics executive from Amazon to further streamline its National OCS Program. There are no guarantees, but its role in the new national network is likely to be an important one.
TransMedics Aviation
In the U.S., all air transport for heart, lung, and liver transplants happens on chartered flights. This inefficient system increasingly creates bottlenecks and extra expenses now that TransMedics' OCS allows for much longer flights between where organs are retrieved and where they need to go.
Medicare, Medicaid, and private insurers reimburse transplant centers for charter flights at great expense. To cement its position as the default transporter of hearts, lungs, and livers, TransMedics is securing a national network of charter flights.
A buy on the dip?
TransMedics reported a net loss of $2.6 million during the first three months of 2023. That's a lot less than it lost a year earlier, but securing its own national network of chartered flights could push profitability further into the future.
Profits later rather than sooner isn't something investors wanted to hear from a company whose shares are already trading at a sky-high valuation. Despite its recent dip, shares of TransMedics are still trading at around 18.6 times trailing sales.
At its presently high valuation, any sign of a slowdown could cause the stock price to crash violently. I'm not letting go of my shares, but I'm probably not going to buy any more until I see how TransMedics' plan to build a charter flight network translates to profits or losses on its income statements.
