Renalytix Stock: Where Are the Meaningful Revenues?
One disadvantage of having a living investment methodology is that as things change, you need to go back and revisit previous conclusions that may have changed. For example, we instituted a rule that prevents us from investing in any firm with a market cap of less than one billion dollars. That’s because the smaller a company is, the more likely things can go pear-shaped. Sure, there’s the potential for more upside, but we’re risk-averse investors who are willing to sacrifice some upside in exchange for reduced risk.
Probably the best rule we implemented was not to invest in companies unless they have meaningful revenues ($10 million per annum or more). This weeds out all the business models that can’t achieve product-market fit and end up blowing through loads of capital trying (the MicroVisions of the world). So, what happens when we like a company that’s not only too small but also doesn’t have any meaningful revenues? Well, we need to revisit our thesis. That’s what we’re going to do today for an AI healthcare company called Renalytix (RNLX) which we last looked at in July 2020. Here’s what we said back then.
Today, that market cap has fallen from $374 million to $248 million, a fall of about 34%. That’s excellent news for anyone who wants to buy the stock, but the question remains – where are the meaningful revenues?
Revisiting Renalytix Stock
The last time we looked at the company was in a piece titled Renalytix AI and Kidney Disease Diagnostics. Since then, the company dropped the acronym from their name and just goes by Renalytix. Revenues have also started to trickle in. Better late than never, but certainly not the $6 million they promised for 2019 in a 2018 investor deck. We previously praised the successful track record of the company’s leader, and it’s disheartening to see promises made that didn’t come to fruition. Nonetheless, here’s what the company had to say about their Fiscal 2022 first-half results which are starting to show green shoots of revenue growth.
We reported testing revenues of $0.7 million in Q2. This compares favorably with revenues from Q1 of $0.5 million. Volumes with Mount Sinai have continued to increase into Q3 and we anticipate test volume to strengthen further as we progress through the remainder of the fiscal year. As additional hospital systems begin to come on stream into fiscal 2023 and beyond, we anticipate further increase to these testing volumes.Renalytix investor update
At $950 a pop, that means they sold about 1,263 tests in the first half of the year, and that’s where we start to wonder about the pace at which sales are happening. Who cares about additional hospital systems coming online in Fiscal 2023, what about the existing total addressable market (TAM) they already have? Renalytix has been working with Mount Sinai for nearly four years, and that relationship alone represents a TAM of nearly $306 million (322,000 patients X $950 a test).
As of the end of March 2022, Renalytix had four regional sales managers and 12 account executives focused on the Veterans Health Administration which represents a $1.3 billion TAM. Selling 734 tests in a single quarter is eff all compared to the potential opportunity that 16 dedicated salespeople should be able to capture. If KidneyIntelX can indeed deliver cost savings of up to $1.1 billion over five years per 100,000 patients with DKD, then this test offering should be selling itself.
Liking Renalytix Stock or Avoiding It?
Traction takes time, and it’s understandable that something disruptive takes time to achieve momentum in the healthcare community where things happen slowly. So, we’re going to assume that Renalytix is on the cusp of achieving meaningful revenue growth and showing their investor base revenues that are commensurate with the label they’ve given themselves – a “global leader in the new field of bioprognosis.” If the company can manage to achieve meaningful revenues – $10 million per annum or more – then maybe they’ll be worth taking another look at. Here’s how that growth might look like based on the pace they’re progressing at right now – 40% growth from Q1 to Q2 – along with input from the Romanian fortune teller we keep on staff who helps us beat the market when 95% of money managers can’t.
If Renalytix can keep growing revenues at 40% per quarter, then they’ll achieve meaningful revenues by the end of Fiscal 2023. That’s about when we might check back in with the stock, but let’s hope it happens sooner than that.
We’re taking several actions based on what we’ve discussed today. Firstly, we’re removing the stock from our Nanalyze Disruptive Tech Portfolio Report and changing the status to an “avoid’ in our disruptive tech stock catalog. That’s because this company has not yet demonstrated traction by surpassing the $10 million a year revenue mark. When they do so, alongside sustained quarterly revenue growth, then we’ll reconsider classifying them to a “like.” As for ever investing in Renalytix stock, we find the value proposition – kidney disease – quite niche despite the company claiming it’s a $12 billion TAM. We’d also need to see their market cap surpass one billion dollars which would likely mean revenues had grown significantly higher than the aforementioned $10 million mark.
“Getting in early” is a flawed approach to investing in tech stocks because it increases the likelihood you’ll be stuck with companies that aren’t able to master product-market fit and then end up pivoting into something else and burning through loads of cash in the process. Your goal as an investor – to realize a return on your investment that exceeds a broad market benchmark – differs from that of any given tech company which is to merely survive. Renalytix is showing some green shoots of revenue growth, but they haven’t shown that the market is eager to adopt their solution at scale yet. That appears to be right around the corner, but that’s what we thought several years ago.
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