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Down 52%, Is TransMedics Stock a Buy on the Dip?
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Down 52%, Is TransMedics Stock a Buy on the Dip?

Sales growth for this provider of organ transplant services is declining.

From the beginning of 2024 until August 23, TransMedics (TMDX 0.56%) The stock rose 123%, but the good times didn’t last long. The lack of earnings in the third quarter sent shares of transplant equipment and services providers reeling. At noon on November 7, the stock was 51.5% below its previous peak.

Hospitals and transplant centers are increasingly relying on TransMedics’ proprietary organ care system (OCS). Is the recent decline in the stock market an opportunity to buy a quality growth stock at a deep discount? Now let’s take a closer look at why shares are falling and the company’s path forward to see if this is a smart buy.

Why did TransMedics’ shares fall?

TransMedics reported Oct. 28 that third-quarter revenue rose 64% year over year to $108.8 million. That doesn’t seem like much of a reason to complain, but it was $6.2 million below consensus estimates and $5.5 million less than what the company reported in the second quarter.

Ultimately, it disappointed investors even more. Wall Street expected earnings to reach $0.29 per share. Earnings, reaching just $0.12 per share, were so below expectations that when management tried to reassure investors by reiterating its previous guidance, almost no one listened.

TransMedics’ revenue and profits began growing rapidly in late 2021 after the U.S. Food and Drug Administration (FDA) approved OCS for the care and transport of donated hearts after brain death (DBD). Expectations that growth will continue at the previous pace have pushed stock prices to a nosebleed-inducing level valuation.

TMDX Revenue (Quarterly) Chart

TMDX Revenue (Quarterly) data Y Charts.

This stock isn’t falling because Wall Street thinks its business is in trouble. It fell because analysts now expect sales and earnings growth to be slightly less exciting than previously expected.

Why is Wall Street still on the rise?

Many analysts covering TransMedics have lowered their price targets, but Wall Street isn’t turning its back on the stock. Oppenheimer lowered price target to $125; This still represents an increase of around 45% from recent prices.

TransMedics is the only company with FDA-approved warm perfusion OCS, which fills hearts, lungs, and livers with warm blood so they can be transported longer distances than previously possible. The company’s proprietary OCS has also greatly expanded the pool of potential donor hearts.

In April 2022, the FDA approved TransMedics OCS for use in donated hearts after circulatory death (DCD). Previously DCD hearts were almost always beating. We now know that placing them quickly in OCS makes them just as valuable as DBD hearts preserved the old-fashioned way.

In the OCS DCD heart trial, patients who received a TransMedics OCS-maintained DCD heart were significantly more likely to survive without complications compared to patients who received a DBD heart stored on ice.

TransMedics OCS makes it possible to transplant organs over longer distances, greatly increasing the likelihood of finding a suitable recipient. The company purchased a fleet of jets in 2023 so it no longer has to rely on charter flights from third parties. In the long run, operating your own aviation service will reduce delivery costs. As the only company with FDA-approved OCS and a fleet of jets, TransMedics doesn’t necessarily pass those savings on to its customers.

TransMedics invested in a new aviation maintenance center in Dallas in the third quarter. Earnings, which slumped in the third quarter, could rise in 2025 because most of the planned aviation-related investments have already been paid for.

According to CEO Waleed Hassanein, the sequential revenue declines seen in the third quarter were due to normal volatility. From the second quarter to the third quarter of this year, liver and heart transplant volumes were 5% lower nationwide.

Buy now?

TransMedics’ shares are down by half from their previous peak, but they’re not cheap. It was trading at 89 times earnings expectations on Thursday, November 7.

TransMedics is still fairly valuable, but it may grow quickly enough to justify its nosebleed-inducing earnings. Citing seasonality for the loss in the third quarter, management still expects total revenue to rise 76% to 84% this year.

In 2025, TransMedics will provide further clinical evidence of OCS. With better outcomes compared to traditional organ storage, the company is likely to become even more popular among transplant centers in the country.

A rich valuation makes this stock a bit risky. If you have a high risk tolerance, adding some TransMedics shares at a low price to a diversified portfolio could be a smart move.