Wall Street Expects Nano-X Imaging Stock to Explode by 120%, and Here's Why It Might

X-ray machines have been around a long time and might not seem like hot commodities, but one manufacturer has recently become a hot investment.

Shares of Nano-X Imaging (NNOX 0.45%) have been on a wild bull run, gaining 163% in the past three months, and Wall Street analysts expect the stock to rise by another 120% over the coming year. And given that it's currently launching its alternative X-ray devices worldwide for the first time, it has a solid chance of meeting those lofty estimates. 

But that doesn't mean it's an investment without risk, and in fact, there are still a few major points of uncertainty that investors need to know. So let's map out the near-term future for this business and see how it could continue to see rapid growth -- and how things might go off the rails. 

With regulatory approval, more sales are on the way

Nano-X's claim to fame is its Nanox.ARC X-ray imaging system, which was approved by the Food and Drug Administration (FDA) on May 1. Management says it scans patients more cheaply than legacy systems, and that it doesn't need as much floor space or maintenance.

In fact, the difference in cost between the Nanox.ARC and older devices is so large that management thinks it could support a new business model entirely. In that model, clinics will pay for each scan they perform using the Nanox.ARC rather than paying up-front for the equipment itself. Right now, the company reports that it costs customers about $40 per scan.

The point of doing things this way is that many potential customers in developing nations need to do X-ray imaging, but lack the capital to purchase a device. Because an X-ray room can cost between $40,000 and $190,000 -- or more -- to furnish with the appropriate hardware, it isn't too surprising that there might be a market for lower-cost solutions.

Management's idea is to avoid competing in the market for X-ray devices as it exists today by targeting trapped demand that's been priced out. It will look brilliant if it works. 

Nano-X is just at the start of testing whether its business model can work. In the first quarter, it brought in $2.4 million, up from $1.8 million a year prior.It recently signed distribution and deployment agreements with Morocco for 270 units, and it's also looking to expand its activities in the U.S. It's already deploying systems in Ghana and Nigeria, likely with many more countries to come over the next few years.

Management thinks that if it can reach a global installed base of 6,850 devices with 20 scans per day per device, it could post revenue on the order of $500 million per year.

The business model remains unproven

The Wall Street average estimate for Nano-X's stock looks very attainable, and its tenure as a hot growth stock is just starting with gusto. Still, there are a few catches with this company, starting with the fact that it isn't yet profitable. That might be an issue soon enough given its plans to continue with the global rollout of the Nanox.ARC at full speed. 

In the trailing-12-month period, it spent $50.5 million in cash, and while it doesn't have a significant amount of debt, it only has $78 million in cash, equivalents, and short-term investments.

But now, it will need to manufacture its X-ray devices at larger and larger scale despite not receiving an immediate return on the units it ships because of its pay-per-scan model. So it could very feasibly run out of money to keep growing rapidly over the next couple of years. 

Therein lies the biggest risk with investing in Nano-X. Its business model will almost certainly find customers since charging for each scan is quite appealing for capital-constrained healthcare organizations. But if those customers don't use their systems as much as management estimates, it'll take a long time to recoup the manufacturing costs.

Likewise, if maintenance costs end up being higher than anticipated, it could tamp down on acquiring new customers while also putting pressure on margins. And since the Nanox.ARC just got approved for sale, for now there's a dearth of data with which to address those issues.

Nonetheless, its preliminary success in partnering with national-level healthcare organizations is a positive sign. If you're willing to take on the substantial risk that its business model might not work -- and as promising as it looks right now, it still might not -- it makes sense to buy a few shares of this stock.

Just watch for anything management says about average usage rates for its machine since this is the single most important variable for the company's success.