Delays And Burn Will Hinder Progress While Telehealth Will Help

Key Takeaways

• Delays in closing key enterprise deals, provider hesitancy, and global funding uncertainty may hinder Butterfly Network's revenue growth and widespread adoption.
  
• High R&D spending and market commoditization risks could limit margin expansion and delay sustainable profitability despite growing commercial interest and an expanding platform ecosystem.
  
• Prolonged sales cycles, shrinking high-margin software revenue, persistent cash burn, and rising churn threaten profitability and future growth, heightening risk of further shareholder dilution.

Catalysts

Develops, manufactures, and commercializes ultrasound imaging solutions in the United States and internationally.

• Although Butterfly Network is strongly positioned to benefit from the expansion of digital health and telemedicine, ongoing delays in closing large enterprise and global health deals reveal vulnerability to external policy decisions and constrained healthcare budgets, potentially limiting revenue growth in the near-to-intermediate term.
  
• While the company's cloud-based AI software and upcoming Compass AI platform are set to drive enterprise adoption and increase high-margin recurring revenues, persistent churn in individual software subscriptions and slower-than-expected conversion from product to SaaS revenue could weigh on net margin improvements.
  
• Despite successful pilots and growing commercial traction with HomeCare and AI-powered diagnostic tools, widespread adoption may be hampered by healthcare provider hesitancy, prolonged procurement cycles, and continued uncertainty in global health funding, which could suppress the top-line ramp for both product and services.
  
• Even as Butterfly leverages long-term advances in miniaturization and cost reduction for portable diagnostics, the threat of increasing commoditization and availability of lower-cost overseas alternatives may pressure average selling prices, restricting gross margin expansion over the long run.
  
• Although the platform ecosystem with Butterfly Garden and third-party AI apps expands the company's addressable market and could enhance customer lock-in, ongoing high R&D and investment requirements to stay technologically relevant will burden profitability and extend the timeline for achieving consistent positive earnings.

Butterfly Network Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Butterfly Network compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Butterfly Network's revenue will grow by 13.8% annually over the next 3 years.
• The bearish analysts are not forecasting that Butterfly Network will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Butterfly Network's profit margin will increase from -71.8% to the average US Medical Equipment industry of 12.4% in 3 years.
• If Butterfly Network's profit margin were to converge on the industry average, you could expect earnings to reach $16.0 million (and earnings per share of $0.05) by about August 2028, up from $-62.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 48.0x on those 2028 earnings, up from -5.7x today. This future PE is greater than the current PE for the US Medical Equipment industry at 27.4x.
• 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 7.61%, as per the Simply Wall St company report.

Butterfly Network Future Earnings Per Share Growth

Risks

• Ongoing macroeconomic uncertainty and healthcare funding reductions, both in the US and internationally, are causing delays or reductions in purchasing decisions for new medical devices, which risks prolonging slow revenue growth and flattening top-line gains.
  
• Large enterprise and medical school deals have not closed as quickly as anticipated, and the sales cycle remains long and unpredictable, reducing near-term visibility and increasing the risk of missing revenue targets over the next several quarters.
  
• The company's software and other services revenue mix has shrunk relative to hardware, and recurring ARR growth remains modest, which could slow the shift to higher-margin, predictable revenue streams and dampen overall gross margin expansion.
  
• Butterfly Network has experienced persistent cash burn, reporting an adjusted EBITDA loss and using $46 million in cash over the trailing 12 months; if expense reductions or new high-margin revenue streams do not materialize soon, future dilutive capital raises could negatively impact earnings per share.
  
• Individual software subscription churn remains a headwind, so without improved product stickiness and better renewal rates, SaaS revenues could stagnate or decline, putting pressure on gross margin and net income growth despite enterprise gains.

Valuation

• The assumed bearish price target for Butterfly Network is $2.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Butterfly Network's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $2.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $128.8 million, earnings will come to $16.0 million, and it would be trading on a PE ratio of 48.0x, assuming you use a discount rate of 7.6%.
• Given the current share price of $1.43, the bearish analyst price target of $2.0 is 28.5% 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.