Butterfly Network Stock – A Play on Portable Ultrasounds

Do as I say, not as I do. We find ourselves guilty of that sometimes. For example, we advise readers to never try and time the market, but we’ll occasionally engage in the practice ourselves. When Alteryx dumped -40%, we couldn’t help but open a position. Sometimes, we’re willing to take on additional risk because we believe the upside outweighs the potential downside. In finance, they call these “risk-adjusted returns,” and everyone will have a different tolerance for risk. For newbie investors, there’s an inclination to take on lots of risk in exchange for a great story.

Many of these great stories you’ll find with special purpose acquisition companies (SPACs) that often take pre-revenue startups public in a process that usually does a disservice to retail investors. Generally speaking, we avoid SPACs like the plague, though we did invest in one. The SPAC vehicle is not inherently bad, it’s the pre-revenue companies that typically use SPACs which we’re not big fans of. When there is a company going public via SPAC that we might like to invest in, usually hype drives the shares skyward before the deal even goes through. Such is the case with Butterfly Network.

The Butterfly Network IPO

Several years ago, we wrote about A Handheld Ultrasound Device for Your Smartphone which detailed how life sciences company Butterfly Network is reinventing the ultrasound machine by squeezing all of its components onto a single silicon chip. Last week, Butterfly Network announced their intent to merge with a SPAC called Longview Acquisition Corp. (LGVW) with the transaction expected to close sometime next year. As a result of the announcement, shares of the SPAC in question jumped over +66%. The deal hasn’t even settled yet, and the Robinhood trader types are already hyping the stock.

This is why we don’t like SPACs. An overly simple explanation of what’s happening is that institutional investors are paying around $10 per share for their investment in Butterfly Network while retail investors have to pay $16.65 for the same shares. While a small premium might be warranted, a premium of 66.5% is out of the question. Wait for the dust to settle. If shares start to approach the $10 mark, then you’ll be paying what the smart money paid.

Let’s take a look under the hood of Butterfly Network.

About Butterfly Network

Click for company website

Building and selling a cheap handheld ultrasound machine is a simple business to understand. According to the company, Butterfly iQ is “the only ultrasound transducer that can perform whole-body imaging in a single handheld probe using semiconductor technology.” Their latest Butterfly iQ+ device connects directly to an iPhone or Android smartphone and tablet to provide its imaging and software features for more than two consecutive hours, while charging to full battery in approximately five hours. Here are some of the key points from our 2018 article on Butterfly Network:

  • The price for Butterfly iQ is unmatched by competitors and expected to get as low as $500.
  • All images produced by the devices are stored in “the cloud” where deep learning algorithms study them and learn how to diagnose medical problems.
  • Ultimately, they would like to get the device in the hands of consumers.

Today, we want to learn more about the inner workings of Butterfly, things like:

  • How many devices are being sold?
  • Is there a software-as-a-service component here?
  • What’s the total addressable market here?

Because Butterfly is going public using a SPAC, we needed to sift through their 636-page filing document looking for the juicy tidbits. Here’s what we found.

About Butterfly iQ

Butterfly received 510(k) clearance for the Butterfly iQ in 2017 and launched in 2018. Today, their products are commercially available in 40 different countries including the United States, Canada, Australia, New Zealand, and throughout greater Europe. In the U.S., Butterfly has made sales to or has agreements with most of the top 100 U.S. healthcare systems.

The product development process seems mature, and the “iQ in the Home” flavor is expected to launch next year. No telling what the price point will be for that offering, but the iQ+ is currently being offered for $1,999 on their home page. (Traditional cart-based equipment typically ranges from $45,000 to $60,000 per new device in the mid-range.)

Credit: Butterfly Network Investor Presentation

Butterfly sold and shipped approximately 12,900 devices in the year ended December 31, 2019, and approximately 12,500 devices in the nine months ended September 30, 2020. Revenues for 2019 came in at $27.6 million, and for the first nine months of 2020 were at $30.6 million. Around 85% of revenues come from product sales and the remainder from subscription services.

During 2019 and for the nine months ended September 30, 2020, approximately 13% and 28%, respectively, of Butterfly’s product and service revenue was generated from customers located outside of the United States. Seems like a lot of recent growth is happening outside ‘Murica. The global market for ultrasounds is around $8 billion, and that number doesn’t account for the 2/3 of the global population that doesn’t have access to medical imaging.

Credit: Butterfly Network Investor Deck

While there are other companies offering handheld ultrasound units like Philips Lumify, the overall market penetration for handheld devices is quite low at less than 3% globally. The Butterfly filing lists their primary competitors as the top five manufacturers of legacy cart-based incumbent ultrasound devices – General Electric, Philips Healthcare, Canon Medical Systems, Hitachi, and Siemens Healthineers.

Lots of investments are being made in shoring up their intellectual property portfolio. As of November 1, 2020, Butterfly owned approximately 275 issued patents and approximately 537 pending patent applications.

To Buy or Not to Buy

A reader recently questioned why we invested in Desktop Metal while at the same time constantly criticizing the mechanics of SPACs. The Desktop Metal SPAC differed from the others in the following ways:

  • The company has revenues and traction.
  • The experienced leadership team has a vision that they appear capable of executing on.
  • The shares only traded at a small premium to what institutional investors paid.

The Butterfly Network SPAC checks the first two bullet points, but not the last one. Last we looked, the acquiring company’s shares were trading at a 65% premium.

For the sake of argument, let’s pretend the price of shares falls back to $11.00 and we’re paying a more reasonable premium of 10% – or ideally, no premium at all. The question then becomes how an investment in Butterfly Network fits into our broader portfolio of tech stocks and dividend growth stocks.

We would categorize Butterfly Network as being in the business of medical devices. Just so happens, we’re holding two medical device companies in our DGI portfolio right now – Stryker (SYK) and Medtronic (MDT). Given we already have a decent amount of exposure to the medical device theme, we’re not overly keen to occupy one of our 30 portfolio holding slots with a medical device company, exciting as it may sound.

For those who decide to pull the trigger on the Butterfly Network SPAC, here are some key metrics to watch.

Growth Forecast Metrics

As with other SPACs, there are the usual forward-looking revenue growth estimates that help justify the company’s valuation against other publicly traded firms with lofty valuations.

Credit: Butterfly S-4 Filing

Investors who get on board should pay attention to management’s ability to hit these targets. Considering the founder, Jonathan Rothberg, is a serial entrepreneur who founded more than 10 healthcare/technology companies, including 454 Life Sciences, Ion Torrent, and CuraGen, seems likely they’ll hit these aggressive revenue growth numbers. We can also see they plan to introduce wearables in 2023, a whole new market the company plans to expand into, and one of their largest growth opportunities.

Credit: Butterfly Network Investor Deck

Conclusion

We really wish SPACs would go away already because they present too many complications that aren’t found with traditional IPOs. In this case, we have a quality company that – at least from where we sit – is inaccessible because shares are being bid up when the deal hasn’t even closed. Institutional investors thought a fair price was around $10 per share, and that’s what we think retail investors should pay as well. Once the deal goes through, shares will trade under the ticker BFLY.

Stryker, Medtronic, and Johnson & Johnson are all companies found in our dividend growth investing strategy, Quantigence. Want to see the rest? Become a Nanalyze Premium annual subscriber.

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