Description

We wrote about Semler on February 19, 2019, and we believe today’s stock price provides an entry opportunity as attractive as that offered at the time of our initial writeup.   The stock has corrected meaningfully due to the market's overall valuation reset and SMLR's earnings miss in the second half of 2021, driven by 2H:21 underperformance in the variable fee business. To be clear, this is not a call on the next quarter.  We believe analyst expectations for 4Q:21 revenue and EPS are too high for SMLR and we have no strong view on 1Q:22 operating results.   

However, we are bullish on the company’s strategic positioning, long-term growth potential, and SMLR’s evolution into a multi-product company with an exceptional business model.  We believe SMLR's management, led by thoughtful and conservative CEO Doug Murphy-Chutorian, has been investing in anticipation of higher expected growth rates for the company as QuantaFlo adoption ramps and new products begin to contribute to the company.  

The current backdrop of macro uncertainty and high inflation is a favorable one for SMLR.  Semler is highly profitable, valuation has compressed to very reasonable multiples (in our view), the company offers a free call option on the growth of new product launches (that should meaningfully contribute by 2023) and sell-side/ buyside expectations have been reset. 

Much has changed since our initial writeup.  

Most notably, SMLR has made meaningful progress in further developing and deepening  its relationships with insurance carrier partners and QuantaFlo remains the leading player in the PAD (peripheral arterial disease) diagnosis market with about 10% overall penetration.  We expect QuantaFlo to continue to deliver attractive growth over the next three to five years and we expect Semler will bring 1 to 2 new products to market over the next 12 months.  The company has 3 to 4 irons in the fire, including 1 internally developed product that we believe is complementary to QuantaFlo and three other licensed products which are targeting markets that are at least as large if not larger than PAD..

We believe the set-up for long-term oriented investors is quite attractive at current levels.  The stock trades at 26.5x our estimate of 2022 GAAP EPS of $2.75 and 20x our 2023 GAAP EPS estimate of $3.65.  At year-end 2022, we expect the company to have roughly $8 per share in net cash.  Adjusting for projected net cash, the multiple on 2023 estimates drops to an undemanding 17.5x.

Longer term, we believe SMLR GAAP EPS can approach $6 to $7 by 2025 as QuantaFlo continues to deliver healthy growth and new products make meaningful contributions to SMLR revenue growth and profitability.  Based on target P/E multiples of 20x-25x, investors can expect to earn 18% to 34% IRRs from current levels.  Of course, higher growth could cause valuations and earnings to surprise to the upside.      

What makes Semler unique?

The company enjoys an exceptional business model with 90% gross margins and 35% operating margins (in 2021, despite a period of investment ahead of new product rollouts.)  

Semler’s business is well positioned for value-based care as it is focused on identifying solutions that diagnose and treat diseases early on in their evolution.

The company enjoys a trusted relationship with its health insurance partners and carriers have been pushing distribution of QuantaFlo into their primary care distribution footprint.

Semler’s existing software integration and product distribution with carriers creates an opportunity to bring more products into the primary care setting that could advantage the carriers and help lessen costs to the overall system.

QuantaFlo is the first successful product of what we and management hope will be many introduced by the company.

Changes since initial writeup

SMLR EPS has meaningfully exceeded street expectations though numbers have lagged our aggressive revenue and EBIT expectations. COVID materially dampened growth forecasts for virtually all med tech and our margin assumptions were somewhat aggressive.  Moreover, QuantaFlo has not transitioned to standard of care as quickly as we anticipated in early 2019.    

EBIT has compounded at an estimated 42% since 2019 and we believe 30% intermediate term growth rates are achievable going forward.

SMLR has experienced a mix shift from fixed license fee contract business to more of a balanced mix betweern variable fee/HRA and the fixed license clinic business.  The company is enjoying good momentum in both business segments that should benefit the company in 2022. 

Semler is on the cusp of becoming a multi-product company.  As a multi-product company SMLR is poised to become a more value-added partner to its existing customers which bolsters our confidence in the company’s long-term growth potential.

SMLR was uplisted to NASDAQ in 2021 and will be added to the Russell 2000.

Potential upside levers

Broadened distribution of QuantaFlo

We believe QuantaFlo is getting closer to standard of care among its key insurance carrier partners.  The company is standard of care in some institutions already.  It would not surprise us to see step function adoption of QuantaFlo by 2023 driven by existing customers (UNH, CVS, etc.) and new ones.

New products

As a reminder, during the third quarter of 2020, Semler announced minority investments in three undisclosed private companies.  Each of the three companies have FDA approved products targeting large chronic disease markets and management has suggested the clinical data for these products is highly compelling.  Moreover, the company is internally developing a fourth product that is making good progress.

Last year the company made some hires that give us some indication of what new product areas the company is targeting, including: Senior Product Manager – Diabetes, Cardiovascular Clinical Educator and Cardiovascular Ultrasound Technologist, among many others.

SMLR plans to provide greater insight into the new product areas and products on the first quarter 2022 conference call.

Management is seeing many opportunities to partner with other companies and leverage its distribution with the insurance carriers.  Over time, we fully expect Semler's business mix to be composed several product offerings, and we believe new products could ultimately equal the size of the core QuantaFlo business.

Catalyst

Strong core growth from QuantaFlo

New product launches in 2022 that are likely to become material to revenue in 2023

Uplist to Russell 2000 could be meaningful benefit to company