RWLK: short at $18, niche market, oversupply of liquidity

I shorted the RWLK when it was at IPO hype of $38, and all the way to $16. Most recently, RWLK reported huge sales growth in Q4 (283% YoY growth from $0.4m to $1.5m) and stock prices rose above $18.

If you give a second look at the market and product, the company is not worth $200m. The only product is exoskeleton for people who lost mobility. Similar as EYES, the company has a long way to go from being profitable; current market cap only reflects Irrational exuberance in the sector

Reasons it is short at current price:

  1. Small market and slow commercialization: the company started marketing in EU from end of 2012, and received FDA clearance in June 2014. They placed 25 and 74 in total for year end 2013 and 2014, respectively. And a lot of them were placed in rehab center (for demo and training purposes), only around 20% are placed on patients. They placed 31units in Q4, probably the best quarter on record. No guidance is given for 2015.
  2. Lack of insurer coverage: cost per unit is around $65k to $135k for patient. For example, Aetna determined the unit experimental and ruled inadequate evidence.
  3. No real moat: the company boasts it has the only FDA approval. The fact is the mark is not difficult to obtain. And the company is facing a team of competitors. EKSO, among them, has CE mark, and is collaborating with Lockheed to develop military products. Japanese robot maker HAL looks like 5 years ahead of RWLK with ~$1.3b market cap, more than 500 users in Japan.
  4. Little institution interest: 6 months after IPO, there is still no institution holding the stock except for VCs. And IPO price was revised down from $14 to $11 is another flag.
  5. Valuation: 2014 revenue was $4m; market cap is ~$200m; EV is ~$170m. Price to sales is 33 using annualized 2014 Q4 sales number. If 2015, only when they outsell Q4, revenue will cover COGS. While the company should spend more than $20m as they open business in more rehab centers. They have more than $40m cash by year-end 2014, no debt, so they are two years before additional financing.

Below is a comparison of EKSO and RWLK, the writer believes EKSO is better on both valuation and business prospects. If you really like their concept, I advise you short RWLK and long EKSO.

Price P/S (ttm) EV/Rev Market Cap EV 2014 Revenue
EKSO 1.28 21.37 19.85 100.6M 92M 4.63M(ttm)
RWLK 17.84 35 43.7 213.7M 173M 3.95M

Summary:
RWLK is a compelling short at current price (~$18); the business is still at early stage, I don’t see sales will explode any time soon;
Peer comparison makes me think $10 or less is more reasonable. After IPO, the stock stayed at $14, which was priced quite generously.
Catalysts include an upcoming end of lock-up period (03/11/2015).

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