Semler Scientific Stock: Why I’m Buying (NASDAQ:SMLR)


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Semler Scientific (SMLR) stock has gotten absolutely destroyed since reporting Q4-21 results on Feb. 28. The stock is down ~30% since earnings, and this came on the heels of the stock getting crushed with all other high-flying growth stocks amidst the market downturn in recent months.

I view this as an excellent buying opportunity and I am adding to my position. I originally invested in 2020 with a cost basis in the $70s. In the five quarters since I invested, the company has produced strong operational results and has recovered from business problems caused by Covid-19. Semler has long-term growth potential and is likely to deliver excellent returns from the recent high-$40s price range.

Q4-21: Variable Fees

Prior to Covid-19 in 2020, Semler had been a smallcap revenue growth darling, posting growth rates above 50%, including 2019 when the company grew revenue by 53%.

2021

2020

2019

2018

2017

Revenue

$53M

$38.6M

$32.8M

$21.5M

$12.5M

Growth Rate

37%

18%

53%

72%

69%

Source: Company press releases, 10-Ks, author tabulations

However, the company struggled with growth in the first half of 2020 because of the nature of its business. Semler is largely a one-product company. It licenses software along with its medical device called QuantaFlo, which is a finger cuff used by a provider that quickly tests a patient for Peripheral Arterial Disease (aka PAD).

Semler licenses QuantaFlo to health insurers, physician groups, and health risk assessment companies. Customers have one of two purchase models: Fixed Fee (recurring) or Variable Fee. Fixed Fee has traditionally provided the bulk of company revenue, but Variable Fee is still significant. In 2021, Variable Fee accounted for 41% of Semler’s vascular testing revenue.

When Covid hit in 2020, Variable Fee revenue – which is based on testing volume – got hammered. Routine healthcare visits and elective medical care were put on hold as the healthcare industry prioritized essential medical services. This hurt Semler. Below is a snapshot of Semler’s Q2 revenue between 2019 and 2021, which illustrates how severely Covid hurt Variable Fee revenue in 2020:

Q2-21 (Covid Recovery)

Q2-20 (Covid)

Q2-19 (Pre-Covid)

Fixed Fee Revenue

$7.6M

$6M

$5.4M

% Change

27%

11%

Variable Fee Revenue

$6.5M

$290k

$2.3M

% Change

>2,200%

-87%

Source: Company press releases and author tabulations

Variable Fee was hurt in the first half of 2020 and began to recover in the latter half of the year. The inverse happened in 2021: Variable Fee spiked in the first half of 2021 and slowed in the second half of the year. In Q4-21, Variable Fee revenue declined 22% yoy and revenue overall was down 5%.

Looking Ahead

The company does not issue guidance and executives on the Q4 earnings call stated that they do not know if the new Variable Fee trend (strong first half of year / weak second half) will remain a permanent fixture moving forward.

The selloff after the earnings results was severe. Revenue and EPS did not meet analyst consensus estimates. Semler is a smallcap and just three analysts officially cover the company.

For FY 2021, revenue growth was strong at 37%. The company generated free cash flow of $15 million and has seen strong free cash flow generation in recent years. The company is in excellent financial condition and is sitting on $37 million in cash.

Semler has a lot of positives going for its business. Its QuantaFlo patent does not expire until 2027. The primary competitor to the company’s technology is the traditional blood pressure cuff ABI device. PAD is often undiagnosed because it is largely asymptomatic. Recent results from a peer-reviewed study in Nevada showed the benefits of preventing future death and disease by detecting PAD using QuantaFlo. And the primary market for QuantaFlo usage is the Medicare population, which will continue to increase in size at a strong clip.

Additionally, Semler is in the early stages of introducing two new software offerings focused on diabetes and alzheimers in partnership with smaller companies that created the technology. These new initiatives are not material to the business at this time, but the company is making efforts to diversify its business.

Valuation / Conclusion

Semler grew EPS 22% in 2021. Assuming the company grows EPS 20% in 2022, we have Semler trading at a Forward P/E of 19 at $47.20/share. This includes the $37 million in cash on the books at a market cap of just under $320 million. For comparison, the Russell 2000 Index trades at a premium to Semler with a Forward P/E of 22. Given Semler’s growth profile, its market opportunity, and its strong financial position, I wouldn’t be surprised to see Semler trade at a healthy premium to the Russell 2000 in the future.

Semler is a strong buy. I expect Semler to outperform the market in coming years. I am adding to my position.



Read More: Semler Scientific Stock: Why I’m Buying (NASDAQ:SMLR)

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