Better Buy: Nano-X Imaging vs. Viking Therapeutics

Viking Therapeutics (VKTX 7.92%) and Nano-X Imaging (NNOX 0.45%) are two small-cap healthcare companies with lots of potential, but their shares come with some hefty risks. They've also both been hot in 2023, rising more than 90% year to date. So which is the better stock to buy right now?

A multi-pronged effort in the lab

A key question for growth investors is just how much of a payoff there might be from an investment. Viking Therapeutics is attempting to develop treatments for some serious conditions.

One of those treatment candidates is VK2809, which aims to address non-alcoholic steatohepatitis (NASH). NASH involves inflammation of the liver and can lead to serious complications (including cancer). The medical community believes it may affect up to 5% of the world's population. With such a large addressable market, the company estimates that peak annual revenue for VK2809 -- assuming it earns approval -- could top $3.6 billion in 2038.

Viking also has VK2735, which is a candidate treatment for treating obesity. It's not as far along the research and development path as VK2809 (which is already in phase 2b trials), but at its peak, management estimates that it could bring in at least $1 billion in annual revenue.

There's lots of potential for the company in the long run if these drugs get across the finish line. And in the shorter term, analysts project an upside of around 67% based on a consensus 12-month price target of over $30.

A new approach to x-rays

Nano-X's potential centers around its multiple-source X-ray system, the Nanox.ARC, which creates 3D visualizations from collections of 2D images. The company says the Nanox.ARC will make medical imaging easier, more affordable, and more accessible worldwide.

Nano-X plans to use a pay-per-use model for its X-ray system. In May, it obtained marketing clearance from the Food and Drug Administration for the multi-source device.

Compared to forecasting pharmaceutical drug sales, it can be a bit more difficult to project how much revenue a medical device of this type could bring in. But according to Fortune Business Insights, the market for medical imaging is rising at a compound annual rate of 5.8% and could be worth $56.5 billion by 2028.

If the company can effectively tap into those opportunities and its 3D X-ray system delivers on its promise, it wouldn't be unrealistic to expect that it could generate more than $1 billion in annual revenue. There's significant upside for Nano-X, but there's not much analyst coverage of the stock. Only Cantor Fitzgerald has set a recent price target for it, at $30 a share. With the stock trading at just under $15, that suggests that Nano-X stock could double in value in the next year.

Which stock has the better financials?

Both of these businesses are high risk in that neither is profitable yet. Nano-X does generate a few million dollars per quarter from teleradiology services, but that's nowhere near enough to cover its operating expenses, which normally total more than $15 million per quarter. Viking Therapeutics isn't generating any revenue.

That means the name of the game for investors considering buying shares of these two companies is cash burn: How much cash are they burning, how much runway do they have, and how big is the risk of dilution? Here are some of the key numbers for investors to consider:

Source: Yahoo Finance. TTM = Trailing 12 months. 

Both companies have similar cash burn rates, but Viking Therapeutics -- with significantly more in cash and short-term investments on its books -- looks less likely to need a cash-flow injection in the near future. 

Viking Therapeutics is the better buy

There's risk with both of these stocks, and it's difficult to assess which one is more risky. Nano-x appears to have less analyst coverage, so if it succeeds, it's possible that it may generate more hype and bullishness from here than Viking Therapeutics will.

But the market size for medical imaging doesn't appear all that big, and for Nano-X's sales to reach a level comparable to the potential of Viking Therapeutics, it would need to truly dominate, and with a pay-per-use model, that might not be easy.

Plus, because it has more cash on its books, Viking may not need to raise money and dilute shareholders as soon as Nano-X will, making Viking the better buy right now.