Restructuring And AI Trials Will Advance Spinal Cord Stimulation

Key Takeaways

• Strategic expense management and resource reallocation could enhance profitability and revenue, particularly through improved net margins and increased U.S. market activity.
  
• Innovative AI technology and regulatory approvals aim to expand market penetration and international reach, potentially boosting revenue and competitive positioning.
  
• Nevro faces revenue decline risks due to market softness, reduced consumer advertising, and manufacturing challenges impacting margins and earnings growth.

Catalysts

A medical device company, engages in the provision of products for patients suffering from chronic pain in the United States and internationally.

• Nevro's restructuring plans and strategic focus on expense management have reduced its net loss and improved its adjusted EBITDA, suggesting potential for improved net margins and profitability in the future.
  
• The company's reallocation of resources to enhance marketing and sales efforts, specifically through increased direct-to-consumer (DTC) advertising, is expected to boost U.S. spinal cord stimulation (SCS) trial activity by the second half of 2025, which could support revenue growth.
  
• Nevro's launch of HFX AdaptivAI, a new spinal cord stimulation technology using artificial intelligence, is anticipated to drive market penetration and improve clinical outcomes, potentially leading to higher revenue and margins due to reduced patient visits and resource utilization.
  
• Expansion of sales territories, coupled with the promotion of associate sales reps to lead these new territories, aims to enhance market reach and improve competitive positioning, which could drive revenue growth.
  
• Regulatory approval for HFX iQ in CE Mark countries provides an opportunity for market expansion in the EU, potentially increasing international revenue starting in the first quarter of 2025.

Nevro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nevro's revenue will grow by 3.3% annually over the next 3 years.
• Analysts are not forecasting that Nevro will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Nevro's profit margin will increase from -27.8% to the average US Medical Equipment industry of 13.0% in 3 years.
• If Nevro's profit margin were to converge on the industry average, you could expect earnings to reach $58.6 million (and earnings per share of $1.43) by about April 2028, up from $-113.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.9x 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 27.7x.
• Analysts expect the number of shares outstanding to grow by 3.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Nevro Future Earnings Per Share Growth

Risks

• Nevro experienced a 6.7% year-over-year decline in worldwide revenue for Q3 2024, with U.S. revenue down 6.5% and spinal cord stimulation trial procedures declining 15.2%, which could impact future revenue growth.
  
• The company faced significant challenges from competitive pressures and ongoing softness in the core U.S. spinal cord stimulation market, potentially affecting revenue and market share.
  
• Nevro reduced its direct-to-consumer advertising spend, which adversely impacted patient lead generation and trial procedures, emphasizing risks to revenue and market penetration if not corrected.
  
• Gross margins were challenged due to a meaningful charge for previously capitalized variances and overhead from transitioning manufacturing, impacting near-term profitability.
  
• Nevro's full year guidance maintains a revenue decline of 5% to 6% from 2023, and the organization anticipates gross margin pressures into 2025 due to lower production volumes and ongoing manufacturing transitions, posing risks to earnings growth.

Valuation

• The analysts have a consensus price target of $6.533 for Nevro 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 $13.0, and the most bearish reporting a price target of just $4.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $450.7 million, earnings will come to $58.6 million, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $5.84, the analyst price target of $6.53 is 10.6% 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.