Shares of Nanox (NNOX -1.87%), the medical imaging company formerly known as Nano-X, shot through the roof recently. Investors were cheering a recent decision from the Food and Drug Administration (FDA) that will allow the company to market its next-generation imaging machine.
Shares of Nanox have already more than doubled in response to the good news, but what investors now need to know is if it could have more fuel in the tank. Let's look at the road ahead of this start-up to see if buying its stock at this point makes sense.
Why Nanox stock could climb much higher
New CT scanners that produce 3D images of people's internal organs may look modern on the outside, but on the inside, they still rely on old technology. They use big, expensive light bulbs to heat metal filaments past 2,000 degrees Celsius to produce a stream of electrons. The costs vary, but it isn't unusual for hospitals to spend more than $100,000 replacing the tube on a busy CT scanner.
Nanox's proprietary X-ray source has a serious advantage over the competition. By employing millions of cones on a silicon chip, it can produce a controllable stream of electrons at low voltages and cool temperatures.
Back in April 2021, Nanox received FDA clearance to market the single-source version of its next-generation X-ray technology. This month, the stock jumped in response to the clearance of the multisource Nanox.ARC because it should be a lot more popular than the single-source version. With X-ray sources arranged in an arc, it can produce 3D images similar to those produced by a CT scanner at a fraction of the price.
The FDA also cleared Nanox's accompanying cloud-based infrastructure, which should enable its up-and-coming teleradiology service, Nanox Marketplace. In February, the company's medical imaging analytics subsidiary connected to the Nuance Precision Imaging Network. With help from the Nuance network, which is owned by Microsoft, plus its own network, Nanox can market Nanox.ARC to providers that typically don't keep a licensed radiologist on staff.
Instead of trying to beat incumbents like GE HealthCare and Medtronic at a game they've been playing for generations, Nanox will target as customers smaller medical facilities that traditionally don't have their own imaging departments, such as urgent care units and outpatient clinics in rural locations.
Reasons to remain cautious
Investors should know the company's single-source device has been a marketing disaster with negative gross margins. Sales grew to $8.6 million last year, but the company reported a gross loss of $6.9 million before subtracting any of its operating expenses.
Once accounting for operating expenses, the company lost a troubling $105 million last year -- and those expenses will swell as it launches Nanox.ARC. This is a burn rate the company can't sustain much longer without a cash injection. At the end of December, it had just $102.9 million in cash, cash equivalents, and securities on its balance sheet.
It's tempting to assume that Nanox's superior technology will allow its business to produce profits. Unfortunately, the company's investing decisions have been questionable. In late 2021, it acquired medical imaging analytics company Zebra Analytics in an all-stock deal for $110 million up front. By the end of 2022, Nanox had written down the value of that acquisition by $50.9 million.
Not now
Nanox's low-voltage source of electrons excites the imagination, but the company's difficulties with execution are red flags. I took a small chance on this stock in 2021, but won't be adding to my position until after the recently cleared Nanox.ARC has a chance to turn this floundering business around.
Independent launches of new medical technology rarely progress according to plan. After witnessing Nanox bleed money as it tried to market the single-source version of its imaging technology, expecting it to succeed with Nanox.ARC seems like overly wishful thinking.
Considering that its market cap is just $840 million, Nanox stock could have a lot more room to rise if its next-generation X-ray sources become the new standard. Until we see the company start to book profits, though, it's probably best to watch its story unfold from a safe distance.
