One of the downsides of having a living investment methodology is that as things change, you have to go back and revisit previous conclusions that may have changed. For example, we have instituted a rule that prevents us from investing in a company with a market capitalization of less than $1 billion. This is because the smaller a business, the pear-shaped things can turn out. Of course, there is additional upside potential, but we are risk-averse investors who are willing to sacrifice some upside in exchange for reduced risk.
Probably the best rule we put in place was not to invest in companies unless they had significant revenues ($10 million per year or more). This eliminates all the business models that cannot adapt to the product market and end up draining tons of capital trying (Microvisions of the world). So what happens when we love a business that is not only too small but also has no meaningful revenue? Well, we have to revise our thesis. That’s what we’re going to do today for a company called Renalytix (RNLX) that we last reviewed in July 2020. Here’s what we were saying back then.
Today, that market cap has fallen from $374 million to $248 million, a decrease of approximately 34%. This is great news for anyone looking to buy the stock, but the question remains: where is the meaningful revenue?
Revisiting Renalytix Stock
The last time we looked at the company was in an article titled Renalytix AI and Diagnosis of Kidney Diseases. The company has since dropped the acronym from its name and is simply called Renalytix. Income also began to flow. Better late than never, but certainly not the $6 million promised for 2019 in a 2018 investor play. did not materialize. Nonetheless, here’s what the company had to say about its first-half fiscal 2022 results, which are starting to show green sprouts of revenue growth.
We reported testing revenue of $0.7 million in the second quarter. This compares favorably to first quarter revenue of $0.5 million. Volumes with Mount Sinai continued to grow in the third quarter and we expect testing volume to strengthen further as we progress through the rest of the year. As additional hospital systems begin to come into service in fiscal year 2023 and beyond, we expect these test volumes to increase further.
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 how fast the sales are going. Who cares if additional hospital systems come online in FY2023, what about the existing youtotal aaddressable mmarket (TAM) that they already have? Renalytix has worked with Mount Sinai for nearly four years, and that relationship alone represents a TAM of nearly $306 million (322,000 patients X $950 per test).
At the end of March 2022, Renalytix had four Regional Sales Managers and 12 Account Executives focused on the Veterans Health Administration, representing a TAM of $1.3 billion. Selling 734 tests in a single quarter is quite comparable to the potential opportunity that 16 dedicated sellers should be able to seize. If KidneyIntelX can indeed deliver cost savings of up to $1.1 billion over five years for 100,000 patients with DKD, then this testing offering should sell out.
Love Renalytix actions or avoid them?
Traction takes time, and it’s understandable that something disruptive takes time to gain momentum in the slow moving healthcare community. So we’re going to assume that Renalytix is poised to achieve significant revenue growth and show its investors revenue that lives up to the label they’ve given themselves – a “world leader in the new field of bioprognosis”. If the business manages to generate significant revenue — $10 million a year or more — it might be worth revisiting. Here’s what that growth could look like based on how fast they’re growing right now – 40% growth Q1 to Q2 – plus the contribution of the Romanian fortune teller we keep on staff helping us beat the market when 95% of the money managers can’t.
If Renalyitx can sustain revenue growth of 40% per quarter, it will deliver meaningful revenue by the end of fiscal 2023. That’s around when we might get back to the stock, but hopefully it will happen sooner than that.
We are taking several actions based on what we discussed today. First, we remove the stock from our Nanalyze Disruptive Technology Portfolio Report and change the status to “avoid” in our catalog of disruptive tech actions. This is because this company has yet to demonstrate its traction by surpassing the $10 million per year revenue mark. When they do, alongside sustained quarterly revenue growth, we will then reconsider their classification in a “like”. When it comes to investing in Renalytix stock, we find the value proposition – kidney disease – fairly niche despite the company claiming a TAM of $12 billion. We would also need to see their market capitalization exceed $1 billion, which would likely mean that revenue had grown significantly above the aforementioned $10 million mark.
“Getting in early” is a flawed approach to investing in tech stocks because it increases the likelihood that you’ll get stuck with companies that aren’t able to master product market fit and then eventually pivot to something else. and burn tons of cash in the process. Your goal as an investor – to achieve a return on investment that exceeds a broad market benchmark – differs from that of any given technology company which is simply to survive. Renalytix is showing some green shoots of revenue growth, but they have yet to show that the market is eager to adopt their solution at scale. It seems to be just around the corner, but that’s what we thought several years ago.
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