Zynex: A Growing Stock In A Bearish Market

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The investment thesis

Zynex, Inc. (NASDAQ:ZYXI) is one of the most exciting companies currently in the health technology sector. Its flagship product, NexWave, is a 3-functionality-in-1 device (which requires a prescription) and works through Interferential, TENS, and NMES. It is currently Zynex’s flagship product, with 80% of revenues depending on it. Unlike competitors in the market that can be bought at Walmart (WMT) and cost a few tens of dollars, NexWave requires a prescription and has very high margins. The company’s stated goal is to get to cover all 800 territories in the next few years (currently about 350 remain) and for each sales rep to be able to generate revenues for the company of $1 million (while now, revenues are around $400k per sales rep).

In addition to this side of the business, the company has strengthened its patient monitoring division in the past year, with the acquisition of Kestrel Labs taking place in late 2021 and bringing into the company two significant products, The NiCO CO-Oximeter and the HemeOX products, with the former likely to be submitted to the FDA as early as mid-2023, and the creation of a new model of blood and fluid volume monitor, the CM-1600. This monitor is a device that, in its first introduction, is having great success among professionals and whose cost could be around $30000 per unit, according to the CEO.

In addition to the strong growth the company is experiencing, management has decided to invest some of the cash on the balance sheet to carry out buybacks at very auspicious times, as the company carried out 20 million buybacks when the average price was between $7-8 per share. Also, the company recently announced a new buyback of $10 million.

Latest quarterly report

Zynex’s latest quarterly results were positive and aligned with analysts’ expectations. The most important figures were:

  • In Q3, orders grew 34% year-over-year.-Net revenue grew 19% to $41.5 million
  • Device revenue increased 25% to $11.3 million
  • Supplies revenue increased 17% year-over-year to $30.2 million
  • Net income of $4.9 million and $0.13 per diluted share in the third quarter and adjusted EBITDA of $8.1 million.
  • Due to the acquisition of Kestrel Labs, SG&A costs increased by 37%, while the gross margin continues to remain around 80%. The company finished the quarter with 23.5 million Cash on the balance sheet, while Cash from operations increased by $9.6 million year-to-date.

As for sales reps, these currently number 430 and the company plans to hire 20 new ones by the end of the year. This is an important figure because, in recent quarters, the company has continuously laid off the least productive reps. Currently, rep efficiency is at its all-time high, with revenues of $430K per rep.

The company also announced guidance for 2022 between $157.4 million and $160.4 million, with a growth of about 22%, and EBITDA between 26.7 million and 28.7 million, with the stated goal of having a long-term EBITDA margin of 20%.

A significant problem for Zynex is being solved

One of the most significant risks of investing in Zynex has always been the lack of diversification in its business and the fact that Tens, as a technology, has numerous scientific articles, sometimes conflicting with each other, on its efficacy. In addition, Night Market research published a short report several months ago pointing out that the company was heavily dependent on the large number of supplies sold regularly to anyone using NexWave.

In the most recent quarterly report, however, it appeared how the company is managing to properly diversify its sales, as NexWave’s share of total revenues went from 83% to 80% while sales of Zynex’s other products, such as cervical traction devices, lumbar support devices, or LSOs, and cold and heat therapy machines, increased. Of course, this is all without considering the company’s monitor division, which could start generating its first revenues as early as 2023. If successful, it would entail further business diversification and faster growth than analysts predicted.

Conclusions

I consider Zynex one of the most attractive stocks to buy now. Its business has proven to be inflation-proof, with revenues remaining steady (despite shifting coverage in or out of network, an element that could have had a material impact on revenue). This is mainly because NexWave is slowly carving out a significant space as an alternative to opioids in pain therapies, especially post-orthopedic surgeries, where it is particularly effective. Moreover, the company is being perfectly managed by its management, led by its founder Thomas Sandgaard, who owns 40% of the company. The interests of management and shareholders are thus perfectly aligned, and this can be seen in particular from the buybacks made or the extraordinary Cash and stock dividend that the company paid out in early 2021.

Moreover, given the company’s increased cash from operations, further buybacks in the future are likely, especially if the Zynex share price remains in these areas. Currently, the monitor division does not generate revenue. Still, the company has invested heavily in it, and should it be successful; it would also allow Zynex to expand into new areas beyond pain management. However, the company has not been very successful in promoting and selling products beyond NexWave, although the situation seems to be changing even in this respect. Ultimately, despite a valuation that may seem at most correct in this market, I believe Zynex, Inc. stock is a Strong Buy for its future growth prospects.