It can be tempting to buy into a business that's rapidly picking up speed, especially when you're willing to take on a bit of risk in exchange for what might be a huge payday down the line. Well, Nano-X Imaging's (NNOX 1.12%) stock is soaring at the moment, with its shares blasting off by 165% in the last 30 days. And there's a solid chance that it's just getting started.
But don't take that price jump to mean that it's only a short-term play. If this company can execute on its interesting business plan in the way that it hopes, it could well have a long and prosperous future ahead.
Here's what you need to know about Nano-X Imaging before considering whether to buy it.
Investors have one less reason to be skeptical
Nano-X's game is to develop X-ray machines that use its innovative digital X-ray sources, which it claims are less expensive to make and operate than traditional sources. A dramatically lower cost of doing scans would allow it to attract customers that traditional manufacturers can't due to their high prices.
To make its product even more accessible to that market, the company is also pioneering a novel business model in which it only charges customers for the scans they run, rather than for the capital cost of the X-ray equipment. Based on its currently signed contracts and projections, each scan is estimated to cost the device operator roughly $40 to administer, with around $14 of that cost going to Nano-X as revenue.
However, until recently, Nano-X didn't have regulatory approval to market its product. So in 2022 it only had $8.5 million in revenue, which it generated via its nascent teleradiology segment. Eventually, its teleradiology services will be enabled by artificial intelligence (AI) and data generated by its X-ray machines.
More importantly, on May 1, the Food and Drug Administration (FDA) gave its final approval for the company's X-ray machine, the Nanox.ARC, clearing the way for it to commercialize the device in the U.S. -- and in countries that rely on the FDA's rulings to decide which products to allow. That last tidbit is especially important, as developing markets like Ghana and Nigeria are where Nano-X is already working to deploy its systems and start bringing in sales.
Now it falls on the company to manufacture, ship, install, and maintain Nanox.ARC units for its global buyers. Those buyers include plenty in countries with large populations, including the U.S., Mexico, Ukraine, Russia, Brazil, South Africa, Italy, and Spain. Wall Street analysts say on average that company revenue will rise by around 105% this year, and another 364% in 2024, which could drive its annual haul as high as $78.5 million.
Under ideal conditions, management sees the company raking in annual recurring revenue of approximately $500 million. But will that really happen?
Key growth assumptions remain untested
Nano-X looks a lot closer to being ripe for a buy now that the Nanox.ARC has FDA approval. Still, for its business model to work, a number of things need to go right, and there isn't any proof of them going right yet.
First, its estimates about how many scans its customers will run could be wrong. In the long run, hospitals might be more likely to use its system to do scans than a more expensive legacy X-ray machine, but in the short term, doctors may be hesitant to use newer devices that they aren't as experienced with. Likewise, administrators may be leery of onboarding or promoting a new medical device that incurs costs in a different way than they're accustomed to. Regardless of the cause, fewer scans mean less revenue, which will make it harder to break even on the costs of manufacturing the machines.
Furthermore, the company might struggle to manufacture enough systems to meet its existing obligations, not to mention installing and maintaining those systems. If a device is broken, it becomes a big problem, as Nano-X can't get paid for scans. And if maintenance or manufacturing costs end up being far higher than the dirt cheap level that management is signaling, it'd be a serious problem for the bottom line.
So Nano-X Imaging is far from being a safe stock, and it could yet experience all manner of headwinds. It'll likely take at least a couple of years before investors can feel confident that its business model is sound. That makes it a poor fit for investors with conservative temperaments.
Nonetheless, if you can tolerate taking on a bit of risk, you might want to consider buying a few shares to gain some exposure to the significant growth that Nano-X is likely to experience. Just keep a close eye on its gross margin if you do: If it doesn't start to improve sharply after a couple of years, the entire enterprise could well go off the rails.
