Growth versus value: It’s a classic dilemma for investors.
Choosing growth often demands a leap of faith—buying into a management team’s vision of a significant commercial opportunity that may require patience and substantial financial investment to realize.
Value, on the other hand, often offers a more straightforward proposition: a business where the sum of its parts isn’t fully recognized by the market, yet it quietly generates strong sales, earnings, and cash flow.
This approach to bargain hunting in the stock market, famously championed by Benjamin Graham, has served his disciple, Warren Buffett, particularly well.
Value and growth
However, what sets the Sage of Omaha apart is his unique ability to find value and growth within a single investment. This strategy requires a long-term perspective, a stark contrast to the quick, in-and-out trading mentality that dominates today’s markets.
That value and growth calculation (rather growth at the expense of value) is one worth considering when assessing the prospects of Zynex Inc (NASDAQ:ZYXI). The group generates its revenue and income from pain and rehabilitation products —a market worth an estimated $950 million — but is now targeting a much bigger prize.
In patient monitoring, it believes it has found an entry into the largest medical devices marketplace, estimated to be worth $3.6 billion annually. Zynex is achieving this by reinvesting some of the cash generated by its core business — a move that may puzzle investors who have valued its shares based solely on the current business model.
The plan is to grow the revenue from an estimated $200 million in 2024 to $800 million annually. The company’s track record lends credibility to this goal; it has already expanded the top-line from $13 million in 2016 to $184 million in 2023.
Goal within reach
CEO Thomas Sandgaard, who started the business from a single room at home nearly three decades ago, believes the goal is within reach. “We should see our business go from $200 million to $300 million, and from there, it is a straight line,” he says. “It’s a case of blocking and tackling to get to $800 million some years out.”
Before diving into these growth plans, it’s important to understand what Zynex is today and the foundation it provides. Supported by a 400-strong workforce, its current portfolio focuses on non-opioid pain management (mainly its NexWave product), rehabilitation products (braces and traction equipment), and devices that aid in recovery from strokes and incontinence.
The company’s second-quarter results showed a 20% increase in order growth year-over-year, despite having 10% fewer staff, while revenue per representative grew 26% to $485,000. Notably, the gross margin on these products was an impressive 80%.
Quarterly revenue slightly missed guidance at $49.9 million, and Zynex expects to generate around $200 million for the full year, with diluted EPS (earnings per share) of $0.20. The company’s financial strength is further highlighted by its $38 million stock repurchase last year and plans to buy back an additional $20 million in shares announced in February. At the same time, Zynex is reinvesting approximately $12 million annually into its patient monitoring business, which it hopes will help propel the company to its long-term $800 million revenue target.
Large market
Zynex Monitoring is developing four new hospital monitoring products that the company believes will be disruptive. Its hemodynamic monitoring systems (CM-1500 and CM-1600) offer a non-invasive method of measuring and assessing blood flow, providing critical information about blood pressure, heart rate, oxygen levels, and cardiac output. Both products have received FDA 510(k) approval.
HemeOx, a total hemoglobin pulse oximeter, has been designed to replace invasive blood draws. And it is developing a sepsis monitoring unit that meets the current challenge of early detection of the condition, an extreme reaction to infection. It is an area of unmet medical need with an estimated 48 million cases annually resulting in 11 million deaths per year.
Central to Zynex’s growth plans is NiCO, a noninvasive CO-oximeter that uses laser technology to measure hemoglobin in the blood, offering a more detailed analysis than standard pulse oximeters, which only measure oxygen saturation. NiCO is set to replace less accurate LED-based technology, making it especially useful in critical care settings like emergency rooms, intensive care units, and surgeries where precise blood gas analysis is essential.
The strategy to reach its long-term revenue target includes expanding the salesforce to around 800 representatives and more than doubling productivity to around $1 million per rep with the entry into the new monitoring vertical. All of this will be accomplished using existing infrastructure and cash flow.
Crucial element
A crucial element of the company’s success will be the commercial launch of the NiCO pulse oximeter.
“We expect to finish that up in October and file [to the FDA] in November,” says Sandgaard. Approval could come as early as the first or second quarter of next year, he adds. To support the study and market roll-out, Zynex has already manufactured pre-production devices.
In a research note, Ladenburg Thalmann adjusted its valuation after the company's Q2 revenue "miss." Despite the revision, the valuation, at $24.50, is still more than three times the current share price. Meanwhile, HC Wainwright continues to recommend the stock with a target price of $16.
Ladenburg remains optimistic about the company's long-term potential, stating: "NiCO remains a compelling growth opportunity for more diversified revenues and expansion into new and large markets."
So, how do we assess this opportunity through the lens of a would-be investor? Well, it is worth remembering the plan mapped is a blueprint for success not a guarantee of it. In other words, this is a risk-reward scenario, not a risk-free bet. Albeit, CEO Sandgaard and the Zynex team have tried to minimize any potential downside. The upside is that the long-term decisions being made now will generate well above average growth being touted – and of course significant value.