Brain Disease Tailwinds Will Ultimately Fail To Offset Mounting Business And Partnership Risks

Catalysts

About Nexstim

Nexstim develops and commercializes navigated transcranial magnetic stimulation systems for brain diagnostics, therapy and neuroscience research.

What are the underlying business or industry changes driving this perspective?

• Reliance on rapid growth in high end neurosurgical mapping could be disrupted if hospitals delay capital expenditures due to healthcare cost pressures and competing navigation solutions. This would slow system sales growth and temper revenue expansion.
• The strategy assumes sustained premium pricing and very high gross margins in a market facing reimbursement scrutiny for depression treatment and pressure to lower device and procedure costs. This creates a risk of margin compression and weaker net earnings over time.
• Expansion into new therapeutic indications such as chronic pain and potential Alzheimer’s applications depends on further clinical validation and regulatory approvals. Any delay or underwhelming data would limit the addressable market and constrain potential revenue upside.
• Partnership driven growth with Brainlab and Sinaptica concentrates expectations on a few counterparties in consolidating hospital and neurotech markets. Weaker than anticipated partner sell through or renegotiated terms could weigh on both top line growth and operating leverage.
• Increasing investment needs for R&D and commercialization of the modular NBS 6 platform in multiple indications, amid intensifying competition in brain stimulation technologies, could require higher ongoing operating expenses. This may dampen EBITDA and delay sustainable profitability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Nexstim's revenue will grow by 23.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.4% today to 25.9% in 3 years time.
• Analysts expect earnings to reach €5.7 million (and earnings per share of €0.8) by about December 2028, up from €-283.0 thousand today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, up from -362.0x today. This future PE is lower than the current PE for the FI Medical Equipment industry at 28.3x.
• Analysts expect the number of shares outstanding to decline by 5.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is benefiting from powerful secular tailwinds in brain disease and disorders, including aging populations and rapid technological advancement in health care. These trends could sustain multi year demand for Nexstim systems and support continued revenue growth.
• The exclusive Brainlab partnership gives Nexstim leveraged access to thousands of neurosurgical customers and a large global salesforce. This may drive higher than expected diagnostic system volumes and improve operating leverage and net margins.
• Scaling clinic partnerships in the United States and growing recurring revenue from service and management fees can build a more stable revenue base that cushions cyclical swings in system sales and supports more resilient earnings over time.
• The Sinaptica exclusivity for TMS EEG in Alzheimer’s research and strong clinical outcomes in treatment resistant depression and chronic neuropathic pain position Nexstim to open new high value therapeutic indications. This could materially expand the addressable market and lift long term revenue and profitability.
• Sustained high gross margins above 80% combined with trailing 12 month positive EBITDA and improving operating results indicate a structural shift toward profitable growth. This may increase investor confidence and support a higher long term earnings multiple.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €12.5 for Nexstim based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €22.0 million, earnings will come to €5.7 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of €14.2, the analyst price target of €12.5 is 13.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.