Tempus AI Stock: Is the Hype Merited?

Money doesn’t buy you happiness. It buys you flexibility. Financially secure people are provided access to more of the most valuable commodity known to man. It’s so valuable that we can’t even put a price on it. Time. When the grim reaper comes knocking, you’d pay anything to make him go away. (It’s a he. Women are more subtle.) So if we could only pick one thing the world’s most powerful technology should be focused on, it would be to improve our health so that we can live longer lives and better combat healthcare problems. Instead of our current “spray and pray” approach to healthcare, we need personalized medicine to most effectively treat everyone’s unique ailments.

The Ultimate AI Use Case

Click for Tempus company website

The ultimate AI use case is to take all the world’s medical data for each individual – images, genetic data, transcripts, blood tests etc. – and feed these connected datasets to a team of artificial intelligence algorithms. AI is only as good as the big data you feed it, so the company with the largest, broadest dataset is likely to come out ahead. That’s the basic thesis behind Tempus AI (TEM) which claims to have “one of largest proprietary datasets in the world.”

Infographic: Tempus product offerings
Credit: Tempus AI

This clever business model sells genetic tests, licenses data from said tests to pharma and biotech firms, then harvests those fees for years to come while simultaneously developing AI applications on their ever-expanding dataset.

In last year’s video on Tempus: Genomics, Big Data, and AI we covered the bull thesis which doesn’t merit much more discussion. It’s a great business model that’s easy to understand. The company’s two primary financial reporting segments – genomics and “data and services” – show strong growth and reasonably strong gross margins (a proxy for future profitability).

Bar chart showing Tempus' revenue segments
Credit: Nanalyze

Every company is an “AI company” these days, and the ground truth is always revenue growth which Tempus has in spades. They’ve also been “doing AI” since we first covered them back in 2020 before AI became the investment theme du jour. The bull thesis is sorted, but before we might consider investing in this compelling firm, we want to explore several questions:

  • What sort of genetic tests are being offered here and how do they compete with companies we like or hold like Guardant (GH) and Natera (NTRA)?
  • Will they need to raise more capital by selling shares (and diluting existing shareholders) or raising debt? Also, what’s the state of their outstanding debt?

Let’s start with the first bullet point – what are these genetics tests being offered by Tempus?

Tempus Genetic Tests

Tempus claims all their big data provides a feedback loop so they can improve their genetic tests quicker than the competition while robotic laboratories allow them to offer cheaper tests. Their predominant focus is on oncology or cancer tests, and they’re certainly not alone. It’s a topic we covered extensively in our recent piece on The Massive Cancer Blood Test Opportunity citing this diagram by Guardant Health showing the genetic testing opportunity as it relates to oncology.

Infographic: Diagram by Guardant Health showing the genetic testing opportunity as it relates to oncology.
Credit: Guardant

Oncology genetic testing providers are targeting one or more of the three areas seen above – screening, recurrence, and therapy selection. When we look at the menu of tests on offer from Tempus, we see two of these areas clearly represented – recurrence (Tempus xM), and therapy selection (Tempus xF), but that tells us nothing about the commercial success they’re having.

Infographic: The menu of tests on offer from Tempus
Credit: Tempus AI

What combination of the above 13 tests are responsible for their $450 million in 2024 genomics testing revenues?

Given their recurrence test (Tempus xM) only debuted last year, our focus is then on their therapy selection liquid biopsies (Tempus xF). Our next clue comes from a lawsuit leveled at Tempus last year by Guardant which targets the recurrence (Tempus xM) and liquid biopsy tests (Tempus xF) which they describe collectively as having achieved “commercial success.” Well, if Tempus xM only became available in 2024, then they’re clearly referring to Tempus xF which was made available in 2018.

But what about Tempus xT (solid tumor assay) and Tempus xE (whole exome cancer assay) which debuted in 2017 and 2018, respectfully? Well, solid tumor assays that require a tissue sample defeat the purpose of a liquid biopsy and are becoming obsolete. So scratch that. As for the “whole exome cancer assay,” that sounds like a more comprehensive screening approach (i.e. more expensive) and would likely be named in the Guardant lawsuit if it was having any degree of commercial success. So, we can conclude that the Tempus liquid biopsy offering (Tempus xF) is seeing the most commercial success and that’s why Guardant is taking them to court.

So what’s at stake here? Since genomics testing represented around 65% of Tempus 2024 revenues, potentially a lot. The Guardant lawsuit (original document here) talks about reimbursement for expenses, damages, and royalties on future tests sold. Ex-Guardant employees are said to be responsible for this situation which makes the wounds really sting. So let’s assume that Tempus loses the lawsuit and ends up having to pay some hefty damages. Do they have the cash needed to pay up? (More on this in a bit.) And whatever royalties are levied will put pressure on those mid-40s gross margins. Perhaps Tempus’s recent acquisition of Ambry Genetics is a hedge against a negative outcome.

Tempus Buys Ambry Genetics

What the Guardant testing diagram seen above omits is the earliest stage of testing – hereditary cancer testing at the germline (in newborns). That’s the first point in time we’re able to identify infants at high risk for particular diseases in the future, not just cancer. Ambry Genetics first came across our radar five years ago and was described then as, “the industry’s most comprehensive suite of genetic testing solutions, benefiting 90% of all U.S. patients covered by public and private insurers.“ They were the first to offer clinical hereditary cancer panels in 2012 and test 400,000 patients annually these days.

In March 2024, the two companies began collaborating so that Tempus could offer hereditary testing under the brand “Tempus xG” which seemed to be a white-label offering powered by Ambry’s technology. It would therefore make sense for Tempus to acquire Ambry because they can then offer those tests at cost. In a letter to stakeholders, Ambry’s CEO makes it a point to say that nothing changes since they’ll be operating as a subsidiary of Tempus. Because most M&A events fail to realize synergies, that’s a good thing. The acquisition was finalized this month for a total consideration of $375 million in cash and $225 million in shares.

Ambry is expected to generate $300 million in revenue in 2024, and its revenues are growing by more than 25% per year, so that’s $375 million expected in 2025. Add that to the $693 million Tempus realized in 2024 and you get $1.07 billion. With Tempus guiding for $1.24 billion in 2025, that means they’re expecting 16% organic growth which seems feasible given their 30% growth in 2024. This also means “genomics” becomes an increasingly large component of overall revenues. But will all that extra data being acquired through the Ambry acquisition help accelerate growth for the “Data & Services” segment? We’ll look to deep dive into the “Data & Services” segment in a future piece. Today, we want to discuss some concerns we had around debt and covenants.

Valuation, Debt, and Dilution

Given all the readily available capital being thrown at AI firms it’s hard to understand why Tempus would take on debt with covenants that require minimum revenues that increase each quarter. In their latest filing document, the company talks about needing to “generate consolidated revenues of $594.1 million” by the end of 2025. Given they exceeded that number last year, and are guiding to more than twice that this year, that’s much less of a concern now. Debt sits at around $468 million following the acquisition of Ambry Genetics.

Everyone may be throwing money at AI ventures hand over fist, but that won’t last forever. How long will it be until Tempus can start generating cash instead of burning it? The company claims they’re “on track to reach our goal of positive adjusted EBITDA in 2025” and points to the below chart as evidence of progress being made in that respect.

Bar chart showing Tempus' adjust EBITDA
Credit: Tempus AI

The acquisition of Ambry is said to help accelerate the “path to profitability on a cash flow and adjusted EBITDA basis” with Ambry realizing $40 million in EBITDA for 2024. At the end of last year, Tempus had $448 million in cash and equivalents while burning through $39.25 million last quarter. Since their operating cash flows are so sporadic, it’s hard to calculate runway here with any degree of accuracy, so there is a risk of more dilution or debt load until they start seeing positive operating cash flows.

Table showing Tempus AI's negative operating cash flows
Credit: Tempus AI

After evaluating the opportunity and risks, Tempus seems appealing provided the “AI” in their name isn’t creating too much hype. Let’s start by calculating our simple valuation ratio (SVR) for Tempus AI stock. The current market cap of $8.5 billion divided by last quarter’s revenues, annualized (200.7 * 4) gives us an SVR of around 10.6 compared to our catalog average of 6.6. That seems reasonable given their strong growth, especially if they can manage to achieve positive operating cash flows in 2025, not just positive EBITDA. Remember, profits are an opinion, cash is a fact.

Thoughts on Tempus AI Stock

Deciding whether to invest in Tempus AI stock isn’t about the powerful networking effects of their business model, their strong revenue growth, or potential move to profitability in 2025. It’s about analyzing risks. The Guardant lawsuit is a threat which could result in a sizable payout liability. When there’s a large pot of gold to be had, lawsuits are to be expected. We’re holding Guardant already so that’s a hedge against the outcome of this lawsuit. What’s more desirable would be all the data that Tempus has amassed which isn’t just about oncology tests. The acquisition of Ambry diversifies their genomics testing revenues from 100% oncology into “new disease categories including pediatrics, rare disease, immunology, reproductive health and cardiology.”

The other consideration surrounds just how much of an “AI company” Tempus is when 75% of their revenues now come from genetics testing. In a future video or article, we’ll take a closer look at the “data and service” components of the Tempus platform and how those might compare to healthcare big data names we’ve covered before like IQVIA.

Conclusion

A test provider like Guardant is appealing based on its own merits, but when adding a big data element, the value proposition becomes even more appealing. The rapid revenue growth Tempus is seeing from licensing their data proves the value of their business model with data leadership suggesting that networking effects will only ensure that it continues growing. The acquisition of Ambry provides the earliest indication of hereditary health problems which helps extend the value of the Tempus AI platform outside of just oncology. A next step would be to drill into their “data and services” segment a bit more. Stay tuned.

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