At the beginning of December, TransEnterix (NYSEAMERICAN:TRXC) had a market capitalization of about $46 million. And with volatile drops between 20%-30% early morning of Feb. 23, TRXC stock’s inflated market cap is finally popping. But despite today’s carnage, it’s still up tenfold from December.
The obvious question is: what changed? And the answer is: not all that much.
Essentially, TRXC stock was found by traders on the Internet. As we’ve seen with huge moves elsewhere in the market, TransEnterix has caught the eye of Reddit. In fact, TRXC’s rally began before the mayhem of late January.
To be fair, the rally itself does change the TransEnterix story somewhat. But not nearly enough to justify a nearly 20x rise in the company’s market capitalization.
How We Got Here
TransEnterix stock has an intriguing hook: robotic surgery.
It’s a growth market. It’s a market that’s already created billions of dollars in returns for shareholders in other stocks. But TransEnterix simply hasn’t been able to capitalize on that market.
This isn’t a new startup looking to revolutionize the space. The company was founded back in 2006. It hasn’t had much success yet. The company’s initial product, the SPIDER Surgical System, was shut down at the end of 2014. Since then, news hasn’t been much better as the company pivots to its newer Senhance system.
In 2019, for instance, according to the Form 10-K filed with the U.S. Securities and Exchange Commission, TransEnterix sold just four systems. That was down from 15 the year before. Unsurprisingly, revenue plunged as a result. Sales dropped about 65% year-over-year to just $8.5 million.
The systems themselves cost TransEnterix almost twice as much. Gross loss was 143% of sales. Operating expenses of just the three largest lines totaled $69 million.
TransEnterix simply has been a cash-burning machine. Investors have paid the price. At the end of 2020, and after a reverse split, shareholders had seen five-year returns of around -90%.
So, again, what’s changed?
Like I said, the answer, really, is not much. A corporate update on Jan. 6 highlighted a few milestones for the company. Senhance saw its first application in pediatrics, with another procedure using artificial intelligence for the first time. Approval in Russia could help sales.
For 2020, TransEnterix expects to have installed 10 Senhance systems, all under operating leases. That’s better than 2019, but still below the 15 installations seen in 2018. This year should see U.S. Food & Drug Administration approval for additional indications, as well as new clinical papers.
But this hardly seems like enough. This is a company whose products simply have never gained traction in the 15 years they’ve been marketed. With 2020 revenue expected to come in at just $3 million to $3.2 million, there’s still not much sign of progress.
This remains a company with a tiny footprint. Perhaps that’s a technology problem; maybe it’s more of a sales and marketing issue. Whatever the cause, it’s difficult to argue that this company is in better shape than it was two and a half months ago. Yet, again, TRXC stock has gained over 1,000% over that stretch.
The Valuation Problem for TRXC Stock
If we’re going to be fair, there is one big change for the company’s prospects: the rising price of TRXC stock itself.
TransEnterix wisely has used the rally to raise capital. It sold $31.25 million of stock in January, and another $79.6 million in an offering that closed on the first of this month.
That capital is a big deal for a company that historically had funded itself through more smaller and more dilutive offerings. In July, for instance, TransEnterix raised $15 million in gross proceeds by selling stock at just 35 cents a share. The offering this month raised more than five times as much capital, while the company actually sold far fewer shares.
TransEnterix now has capital to go forward with. But it also has a massively inflated stock price. The current market cap values around $1 billion.
That’s a huge sum against $3 million in revenue. Perhaps TransEnterix has promise, and the capital raised will help. But investors are valuing a company with no track record of success, in a competitive space, at around $1 billion.
That’s far too high. This is the same company that was worth less than $50 million just a couple of months ago. The capital infusions help, but not that much. This is a “Reddit rally,” pure and simple. TransEnterix has been smart to take advantage of it and sell stock. Investors would be smart to do the same.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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