2017 | 2018 | ||||||
Price: | 4.05 | EPS | NA | NA | |||
Shares Out. (in M): | 31 | P/E | NA | NA | |||
Market Cap (in $M): | 124 | P/FCF | NA | NA | |||
Net Debt (in $M): | 5 | EBIT | -54 | -44 | |||
TEV (in $M): | 119 | TEV/EBIT | NA | NA | |||
Borrow Cost: | Available 0-15% cost |
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Company Background
T2 is a diagnostic company that markets a benchtop instrument that is able to assess blood samples to determine the presence of fungal infections for the detection of sepsis. Sepsis is a severe inflammatory response to a bacterial or fungal infection with mortality rate of ~30%. Accurate and rapid identification of sepsis is important as each hour of delay in initiation of treatment is associated with an average decrease in survival of 8%.
Historically, patients at risk of sepsis would have a blood sample cultured over the course of +48 hours in order to determine the infecting pathogen. T2 shortcuts this paradigm by allowing for diagnostics to be performed on actual blood samples, providing a turnaround time of approximately 4 hours. Its instrument is marketed for a list price of $150,000 and the individual tests are sold for ~$200.
Short Thesis
There are a number of shortcomings to the current T2 business. Firstly, the company's currently marketed diagnostic only tests for the presence of fungal infections, which only comprise 5% of severe sepsis and septic shock cases. Without a broad enough assay that can test for the majority of the causative pathogens (e.g. bateria), the diagnostic does not deliver much utility. T2 is in fact seeking 510(k) clearance from the FDA on a bacterial panel, which may be approved later this year.
The more important issue however, is that while the company and the street all tout the fact that faster and more accurate treatment decreases mortality, T2's diagnostic does nothing to speed the time to administration of a therapeutic. In practice, once a patient is suspected of sepsis, the patient is usually immediately administered a bundle of broad spectrum antibiotics. Once the causative pathogen has been identified (typically through blood culture analysis), the antitbiotic regimen is peeled back so only the required therapies continued to be administered (http://www.survivingsepsis.org/SiteCollectionDocuments/Bundle-3-Hour-Sepsis-Step3-Antibiotics.pdf).
There are theoretical concerns about drug-resistant superbugs and curtailing unnecessary antibiotic administration is one way to prevent the development of these surperbugs. In current practice, patients are weened off of antibiotic therapy after a couple of days when the blood culture results are received. T2 can help ween patients of the antibiotic bundle more quickly given its test turnaround time is 4 hours. Broad spectrum antibiotics are cheap however thus the value prop is not tremendous.
There are manifold other challenges to T2. The list price of $150,000 will require budget approval at most hospitals which is a slow and bureaucratic process that requires timing a sale with a hospital's budget cycle. Encouraging adoption will require a commitment from the field force. Utilization is currently sporadic at best and very few clients have incorporated T2 into their sepsis protocols.
Current Situation
Despite much fanfare at IPO in 2014, the launch has been lackluster and has significantly underperformed expectations. The company has generated $9mm in aggregate revenues since 2014 (sales were $2.8mm in 2015, $4.1mm in 2016, and expected to be $4.4mm in 2017), far short of the hockey stick projections that management and the street painted. Though the stock has fallen over 40% in the last year, there is still plenty of room to the downside.
The company currently has $46mm of cash and $41mm of debt. The debt is a six year note with three years of interest only payments. The more pressing issue is that the company has a current operating burn of $14mm and likely has less than a year of cash runway. Despite the recent drop in share price, the company still trades at +30x LTM revenues.
In order to finance the business going foward, the company will likely need to raise capital on terms that are onerous to existing shareholders, putting additional pressure on the stock.
Risks
The company has submitted a 510(k) application for approval of its bacterial assay, which if approved, could provide it with much broader coverage of relevant causative pathogens. The stock may increase in response to a positive decision from the FDA but the regardless, the deterioration of the business is likely to persist.
- Continued lack of revenue traction
- Going concern risk as the company runs out of capital
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8 | |
Different sector and different era, but IOT is giving me major FIO vibes with the aggressive insider selling and promotional narrative around what is essentially a commoditized core offering. FIO was the public darling of the flash memory space at a time when they were the "pure play" and a lot of the competitors that ended up eating their lunch were private or divisions of large flash memory companies. They had an awesome sales and marketing organization but no ability to build a real moat, and a hyper promotional management team that ignored competition and live in an imagined reality on investor calls. That was a lumpy whale driven business, so different. In this business, IOT loses the whale RFPs (Amazon, USPS to Geotab, FedEx recently to Motive https://www.linkedin.com/posts/motive-inc_we-are-proud-to-announce-fedex-freight-as-activity-7234991679009615872-vMRz/). I respect that these guys built Meraki but that was a very different sector. There are so many red flags here and I think we know how the story will end. | |
7 | |
What is the 5-10 year terminal value of the business when OEM integration / autonomous really strikes? The downtick in net retention this quarter shows the market is tough enough competing against other aftermarket players. Really struggling to see how the stock can work higher intraquarter before addressing the Q4 guide and 2026, which we do not believe management has room to walk up.
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6 | |
The quarter was pretty clean, but the beat and raise by 3.5% was not much greater than last quarter's 3.1% despite a lot of hype intraquarter. $1m of ACV from AirTags is ho hum. Net dollar retention also dipped to 117% from 119% likely reflecting some of the churn we picked up on in our checks. New sales activity remains very healthy though, and likely benefitted from the customer and analyst event in late June. Still, this is a rapid implied decel (22% growth in Q4) and FCF margin in H1 was ~5% despite all the stock based compensation. So it's barely a rule of 40 company now and will be not even close soon yet sells at 15x revs. Motive is putting on a hurt on these guys, as is Geotab, and they are both building healthier businesses (we think).
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5 | |
The sell side has been very bulled up on Samsara since its analyst day in June. The sell side is very excited about the ruggedized AirTag product and several analysts are triangulating a significant revenue beat based on app download activity as a proxy for new customer installs. Conversely, we are more excited about the short than when we wrote it up given news of several high and low profile customer defections or RFP losses and more confirmatory checks as to market saturation and an inevitable growth deceleration. We will see which view wins out in the short term tonight (we expect to hear a whole lot of AirTag hype), but in the long-term feeling comfortable whether or not this quarter shows cracks in the facade. | |
4 | |
Really clean post integration results from Powerfleet / AIOT this morning. Despite our bearishness on the sector taking a top down view, the long thesis here has real credibility and if they can keep taking Samsara accounts as they did with IMC Logistics, this will be a great pair trade. | |
3 | |
Appreciate that liverpool. PWFL (which upgraded its ticker to AIOT yday) could be a very attractive long and I've been spending a lot of time on it lately. At these prices the fact that MIXT was fundamentally undervalued and undermanaged gives you a nice margin of safety if the team can execute. You can paint a picture of a $10+ stock if things go right. Obviously integrating a company with significant South African, Israeli and US operations is not a layup, and the macro could be more of a headwind than is appreciated for core PWFL. Competitive landscape also is tough but PWFL benefits from playing in niche markets that others are not chasing as aggressively. It's actually a very good sign to me that management is not targeting aggressive top line growth and is focusing more on margins. As far as topline goes, the fact that Samsara is decel'ing while spending 50% on S&M should be a cautionary signal that PWFL is not going to magically accelerate to a double digit grower overnight. I'm not yet long PWFL but working on it and would definitely own it if I felt I needed a bit of a hedge on this market performing better than I expect. No doubt there is some value to the single pane of glass vision Samsara portrays. I believe they will struggle to be best in breed in the adjacent markets. For example, in site surveillance, there are some really strong, well run and profitable competitors with incumbency. Some of these markets like the ruggedized airtag are POC phase and probably years away from material revenue if they ever get there. In fleet, Samsara delivers a nice holistic solution, but it's ultimately a commodity and they don't have any durable moats. The installed base has stickiness as you note but any company with reasonably mature processes is issuing periodic RFPs and managing vendors. It's a pain to retrofit but to get refreshed hardware and save 20% on MRR you would probably do it. One of the issues here like with any commodity market is that while the headline ROI delivered from implementing the technology is really good, that is the case for all the vendors so you can't manifest that customer ROI into an attractive margin structure as easily as one would think.
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2 | |
Interesting write-up, no doubt they shouldn’t be trading at their current valuation. Thoughts on them only selling their whole service offering as opposed to peers that let companies mix and match different needs with different providers. I’m also looking into PWFL as a long and seems pretty undervalued especially given strong revenue retention characteristics of the business. I guess the business has a moat due to the pain of equipping a fleet with completely new telematics equipment and associates software but the valuation is still very unreasonable IMO. Thoughts on PWFL as a long? | |
1 | |
https://investors.samsara.com/events-and-presentations/samsara-investor-day-2024/ Recommend watching. Samsara's two reference customers largely highlight commoditized features offered by all major telematics vendors. The Airtag product launch is also a big red flag for a "SaaS" company. The fact that Samsara continues to try to pivot to new / adjacent markets that are going to be even more capital intensive with long paybacks is a red flag and a tell on the tapped-out growth in its existing fleet telematics market. |
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