FDA Submission Success Will Advance DeepView Global Opportunities

Key Takeaways

• Successful burn validation study and international expansion strengthen FDA submission, potentially accelerating approval and driving future revenue growth.
  
• Military-funded development and IP entity spin-off open new revenue streams, leveraging efficient R&D and unlocking additional value for earnings improvement.
  
• FDA approval delays and reliance on government contracts could disrupt Spectral AI's revenue growth and earnings stability in emerging markets.

Catalysts

An artificial intelligence (AI) company, focuses on predictive medical diagnostics in the United States.

• The successful completion of the burn validation study showing DeepView's superiority over clinical judgment will bolster the FDA submission targeted for 2025, potentially accelerating regulatory approval and subsequent sales, which may enhance future revenue.
  
• Expansion into international markets with successful deployments in the U.K. and Australia will provide real-world clinical data to strengthen the FDA submission and build a case for broader commercialization, likely driving future revenue growth.
  
• Development of the DeepView Snapshot M, funded by military grants, aims to tap into military and emergency care settings by 2027, potentially opening a new revenue stream while leveraging government funding to maintain R&D expenditure efficiency.
  
• The spin-off of Spectral IP into a separate publicly-traded entity focused on monetizing IP assets could unlock additional value and provide financial flexibility, potentially improving earnings by leveraging non-core business assets.
  
• Strong financial backing including a new long-term debt financing and existing government contracts provide a stable financial foundation, reducing short-term financial risks and enabling focus on strategic initiatives to boost future earnings.

Spectral AI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spectral AI's revenue will grow by 31.5% annually over the next 3 years.
• Analysts are not forecasting that Spectral AI will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Spectral AI's profit margin will increase from -51.8% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Spectral AI's profit margin were to converge on the industry average, you could expect earnings to reach $8.7 million (and earnings per share of $0.28) by about May 2028, up from $-15.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $16.9 million in earnings, and the most bearish expecting $-32.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, up from -2.0x today. This future PE is lower than the current PE for the US Medical Equipment industry at 30.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Spectral AI Future Earnings Per Share Growth

Risks

• The FDA submissions and approvals required for the DeepView system pose a timetable risk, potentially delaying commercialization and impacting future revenue growth prospects.
  
• The company's heavy reliance on government contracts, specifically BARDA, could result in volatile revenue streams if government funding priorities shift, impacting overall earnings stability.
  
• Spectral AI's global expansion into markets like the U.K. and Australia is in very early stages, with expected real-world data outcomes and feedback that could alter or delay commercialization strategy and expected revenue contributions.
  
• The spinoff of Spectral IP into an independent company could complicate financial reports and operational focus, potentially affecting management's ability to improve net margins through operational efficiency.
  
• The development and integration costs associated with the DeepView Snapshot M, alongside uncertainties in military adoption and long-term funding, could increase expenditures without corresponding increases in revenue, pressuring net margins.

Valuation

• The analysts have a consensus price target of $4.99 for Spectral AI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.45, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $67.3 million, earnings will come to $8.7 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $1.24, the analyst price target of $4.99 is 75.2% higher.
  
• 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.