Zynex: ‘Electric’ Growth And Strong Earnings Keep Us Bullish (NASDAQ:ZYXI)

Pat J. Fraley

Zynex, Inc. (NASDAQ:ZYXI) designs, manufactures and markets medical devices designed for pain management and as an alternative to opioids or traditional medications. The electrotherapy battery-operated devices are intended for home use and provide a non-invasive nerve and neuromuscular stimulation generated by an electrical pulse connected to the body via electrodes. […]

Zynex, Inc. (NASDAQ:ZYXI) designs, manufactures and markets medical devices designed for pain management and as an alternative to opioids or traditional medications. The electrotherapy battery-operated devices are intended for home use and provide a non-invasive nerve and neuromuscular stimulation generated by an electrical pulse connected to the body via electrodes. The products follow FDA regulations and are marketed to physicians in the U.S. who prescribe the treatment which is covered for patients by most insurance plans. The stock is up over 130{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} year to date supported by firming profitability, and overall solid fundamentals. We are bullish on shares and see more upside with continued growth momentum. The stock appears attractive at the current level following a recent pullback.

(Source: finviz.com)

ZYXI Financials Recap

Zynex last reported its Q2 earnings on July 28th with GAAP EPS of $0.09 which was in line with consensus expectations. Revenue in the quarter at $19.3 million climbed by an impressive 87{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} year over year and was slightly ahead of estimates.

(Source: Company IR)

The story here is accelerating demand for the company’s market-leading “NextWave” electrotherapy device. Total orders climbed 37{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} y/y with overall revenues supported by sales of related supplies including the electrodes and batteries which represent a recurring revenue stream and 77{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} of total revenues. By this measure, each device order can leverage into an expanding revenue base. Impressively, there was an update following the quarter-end when the company announced in September that orders for July and August climbed by 83{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} compared to the period last year.

(Source: Company IR)

In terms of financials, this was the 16th consecutive quarter of consistent profitability. The gross margin at 79{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} has been relatively steady around 80{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} over the past year. The company maintains an overall strong balance sheet position ending the quarter with $17 million in cash and no long-term debt. Working capital also improved to $24 million from $17 million at the end of 2019.

Management Guidance and Consensus Expectations

For the full-year 2020, management is guiding for revenue between $80 million and $85 million, along with adjusted EBITDA between $15 million and $18 million. If confirmed, the midpoint of the revenue targets represents an increase of 82{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} y/y. Continued growth is expected to be driven by an expanding national sales team. The company ended the quarter with 300 representatives, more than doubling since 2019. After the quarter-end, a press release highlighted that the company had already onboarded 400 salespersons on track to end the year with 500, with a target of over 600 by the end of 2021.

(Source: Company IR)

There is an expectation that new hires can gradually increase productivity over time. Compared to the current annual production of around $300k per representative, the company has a long-term target for each employee to drive $1 million in sales per year within 18 months of hire. If we consider the company’s target of 600 employees each producing $1 million in sales, firm-wide revenues could reach $600 million.

While we believe that the productivity target may be aspirational and difficult to achieve, even with a more modest estimate of average productivity of $500k, firm-wide revenues could reach $300 million over the next couple of years, up 5.0x compared to sales over the past year. Taking a look at consensus revenue expectations for 2021 and 2022, an estimate for Zynex to reach $150 million in sales for 2021 and $192 million in 2022 implies the market is projecting an average sales per employee will remain around $300k per year.

In our view, there is an upside to these estimates considering the growth opportunities from new products and the expanding revenue base impact on recurring revenue streams. In terms of earnings, there is also an expectation of accelerating EPS from $0.33 estimated this year to $0.51 in 2021 and $0.83 in 2022.

(Source: Seeking Alpha)

Analysis and Forward-Looking Commentary

In consideration of the high growth environment and earnings momentum, the stock’s current valuation appears reasonable. A forward P/E of 56x based on this year’s estimates narrows to 36x on the 2021 consensus EPS. If the forecasts are reached, we argue that ZYXI is relatively cheap in the context of consensus revenue and earnings growth averaging over 50{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} for the next 2 years.

ChartData by YCharts

Long-term company objectives, separate from increasing the labor force, include the launch of new products and an entry into the international market. The company is also open to strategic M&A while maintaining a focus on maintaining strong fundamentals. Overall, we like the growth story and recognize a positive outlook for the company.

(Source: Company IR)

Response to ZYXI Bearish Thesis

In an article published on Seeking Alpha by contributor ‘Night Market Research’ in June, the author laid out an interesting bearish case and short idea for Zynex. The main argument was that the company was simply a distributor of commoditized products, largely dependent on patient insurance reimbursements to maintain the recurring demand for the revenue-driving batteries used in the devices. The author believes the market opportunity is limited and sees a significant downside to margins going forward and shares could potentially be worthless.

First, shares of ZYXI fell by as much as 30{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} at its lowest point from the time the research was posted and we respect all types of profitable trade ideas. It was a good presentation bringing up some compelling points so the author deserves recognition there. Stocks always have risks and it’s still possible shares of ZYXI decline further.

That being said, we believe some of the accusations are unwarranted and take away from what is a real growth story and GAAP profitability. Absent any evidence of an accounting scandal or official fraud investigation, investors need to take the financial results at face value. The Zynex management team deserves recognition for building a solid business that is capturing a growing market opportunity.

It’s fair to question if the company is overcharging for the batteries or if insurance plans will continue to cover the devices, but in our view, there is nothing inherently sinister regarding the practices. It’s just a reality that the devices require batteries in its normal operation as part of a physician-prescribed treatment. Patients should expect all related costs to be covered. Zynex has proven that its sales and distribution network can drive growth while the marketing initiatives add value. We are bullish on the long-term opportunity even if margins have some downside from the current level.

(Source: Company IR)

Zynex’s core NextWave product benefits from mass-market appeal as most people suffer from some type of muscle-related pain and a significant portion of that group may be open to trying out alternative treatments. Within the specialized segment for Electrotherapy, the Zynex brand and the NextWave device are recognized by patients. Beyond organic growth opportunities, word of mouth recommendations by users to friends and family support continued momentum and market adoption.

Takeaway

We believe Zynex has a long growth runway with a significant opportunity to deliver more devices to patients that can potentially benefit from the treatment. Considering what is an untapped international market, there is upside to current market growth and earnings estimates. We rate shares of ZYXI as a buy with a one-year price target of $25 per share representing a 30{397f7d3bf28e79e4b04697a61c19976344b6039fc71c31bcb0404a4bd2f8b6ab} upside. A strong balance sheet and consistent profitability highlight overall solid fundamentals.

While a date has not yet been confirmed, the Q3 earnings can be expected in late October or early November. Monitoring points include the trends in sales along with the evolution of margins. We’d like to see more progress in diversifying the revenues with improving results from the smaller product lines. Risks here include the potential of underperforming expectations which would likely bring renewed bearish sentiment towards the stock. Longer term, the competitive environment should be closely watched for the potential of larger companies introducing similar electrotherapy devices pressuring market share.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ZYXI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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