[Updated: 6/1/2021] IRTC Stock Undervalued
We believe that the stock price of iRhythm Technologies (NASDAQ:IRTC), a healthcare company that provides ambulatory electrocardiogram (ECG) and cardiac monitoring products, looks undervalued at current levels of around $75. IRTC stock is actually at the same levels it was on March 23, 2020, when broader markets made a bottom. This compares to the S&P which has risen 88% over the same period.
The significant underperformance can be attributed to a revision of Medicare reimbursement rates by one of the Medicare Administrative Contractors – Novitas Solutions – earlier this year. The new rates are expected to result in a 15% cut in the top-line for 2021, compared to what it would have been as per the old rates. This development sent IRTC stock crashing over 70% year-to-date. Note that IRTC stock had risen to levels of around $275 in early 2020, but it has been on a decline since the end of January when the new rates for Medicare reimbursement were disclosed.
Now that the stock has seen a large drop (down 39% in the last one year) despite revenue growing 20% y-o-y over the last four quarters, we believe IRTC stock is oversold, and it will likely see a rebound in the near term. Our dashboard ‘Buy Or Fear iRhythm Technologies Stock‘ provides the key numbers behind our thinking.
Looking at a longer time period, IRTC stock is up 35% from levels of $56 seen toward the end of 2017. The rise in the stock price over the last three years or so can be attributed to favorable changes in the company’s revenue per share (RPS). The company’s revenues grew a solid 167% to $265 million in 2020, compared to $99 million in 2017, due to higher demand for its Zio services, iRhythm’s complete ambulatory monitoring solutions. The company’s shares outstanding increased 22% over the same period due to share issuances. This means that on a per share basis, the company’s revenue grew 119% to $9.56 in 2020, compared to $4.37 in 2017.
With a growth in RPS, the company’s P/S multiple expanded from levels of over 13x in 2017 to 25x in 2020. However, given the sharp decline in IRTC stock over the recent months following the announcement of revised Medicare reimbursements rates, the P/S multiple has now plunged to 8x, and we believe that the P/S multiple will likely rise going forward.
Outlook
iRhythm Technologies has seen a strong growth for its ambulatory monitoring solutions over the recent past, a trend expected to continue in the near term. Looking at the company’s performance in Q1 2021, total revenue grew 17% y-o-y to $74.3 million, 5% above the $70.5 million consensus estimates. However, the company’s loss per share of $0.95 was higher than the consensus estimate of $0.83 loss per share. The company expects a 4% sequential volume growth in Q2.
While we know why IRTC’s stock has corrected over the last couple of months, the selling now appears to be overdone, in our view. The company has stated that it is working with Novitas on an alternative pricing approach, which may be applied to other Medicare Administrative Contractors as well. Overall, the decline in the IRTC stock doesn’t appear to be in-line with the expected loss of revenues per the new rates. Going by the consensus estimates, revenues are still expected to grow 14% in 2021 and 9% in 2022. At the current price of $75, IRTC stock is trading at 7x its expected RPS of $10.35 for full-year 2021, and the 7x figure is much lower than levels of 13x and 11x seen in 2017 and 2018 respectively, implying there is significant room for growth in IRTC stock.
[Updated: 4/13/2021] IRTC Stock Growth
The stock price of iRhythm Technologies (NASDAQ: IRTC), a healthcare company that provides ambulatory electrocardiogram (ECG) and cardiac monitoring products, saw a large 40% drop in a single trading session yesterday. This large drop can be attributed to the company’s press release on the adverse impact of new rates on its business. The revenues for iRhythm are dependent on Medicare reimbursement rates by Medicare Administrative Contractors, and based on new rates by Novitas Solutions, the company expects a $13 million hit just in Q1 2021. Moreover, the company has stated that if those rates were applicable in 2020, the adverse impact on its top-line would have been around 16% while its gross margins would have contracted by 500 bps to 68.9%. Looking at the recent drop, the 40% plunge for IRTC stock yesterday and 41% over the last five days compares with a 1.4% rise seen in the broader S&P 500 index. Now, is IRTC stock poised to drop further? It doesn’t look that way.
Firstly, let us look at the numbers. Going by the stock price of $133, before yesterday’s fall, IRTC stock was trading at 11.6x its estimated revenue-per-share (RPS) of $11.42 in 2021. Now, the Medicare represented 27% of the company’s total revenues in 2020, and assuming the same contribution in 2021, Medicare revenues would have been around $86 million in 2021 (as per the old rates). Therefore, based on the impact of new rates, Medicare revenues will likely fall to around $37 million in 2021, implying a $49 million impact on the top-line. So, 2021 revenues will now be around $268 million or $9.66 on a per share basis. Going by similar P/S multiple of 11.6x, the stock price should be around $112, instead of $80 currently. In fact, at $80, we are looking at a P/S multiple of 8.3x, compared to 11.6x seen just the day before yesterday. While some of the decline in the multiple is justified, given that gross margins have also declined, we believe that the recent correction is overdone, and the stock should see higher levels in the near term.
Furthermore, based on historical trends, if IRTC stock moved by -5% over 5 trading days, THEN over the next 21 trading days IRTC stock moves an average of 10%, which implies an excess return of 7.7% compared to the S&P500. More importantly, there is 77.2% probability of a positive return over the next 21 trading days and 72.2% percent probability of a positive excess return based on our AI engine. But how would these numbers change if you are interested in holding IRTC stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test iRhythm Technologies stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just one day!
Some Fun Scenarios, FAQs & Making Sense of iRhythm Technologies Stock Movements:
Answer: Consider two situations,
Case 1: iRhythm Technologies stock drops by -5% or more in a week
Case 2: iRhythm Technologies stock rises by 5% or more in a week
Is the average return for iRhythm Technologies stock higher over the subsequent month after Case 1 or Case 2?
IRTC stock fares better after Case 1, with an average return of 7.5% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 3.6% for Case 2.
In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.
Try the Trefis machine learning engine above to see for yourself how iRhythm Technologies stock is likely to behave after any specific gain or loss over a period.
Question 2: Does patience pay?
Answer: If you buy and hold iRhythm Technologies stock, the expectation is over time the near term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.
Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!
Question 3: What about the average return after a rise if you wait for a while?
Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks – although IRTC stock appears to be an exception to this general observation.
It’s pretty powerful to test the trend for yourself for iRhythm Technologies stock by changing the inputs in the charts above.
While IRTC stock looks like it can rebound, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for The Toro Company vs. Vertex Pharmaceuticals.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
