Semler Scientific (SMLR) is recovering from the bear market at the end of 2021 through mid-2022. The stock has an attractive valuation and the company is expected to grow revenue at strong double-digit rates in 2024. The stock also has a bullish technical set-up on the long-term monthly chart. Given these conditions, the stock has a good chance to increase at an above-average pace in 2024 and could increase by 50% within one year.

Company Background

Through its patented FDA-cleared healthcare diagnostic equipment products, Semler Scientific screens for two main conditions: peripheral arterial disease [PAD] and heart dysfunction [HD]. Both products use sensors and run on iOS, Android, and Windows mobile devices and can provide accurate test results in less than 5 minutes. The accuracy, efficiency and quickness of the test results help improve patient outcomes and minimize operating costs.

The company's QuantaFlo PAD product provides a test for peripheral arterial disease. QuantaFlo PAD analyzes arterial blood flow to detect abnormalities. QuantaFlo can detect all stages of PAD including crucial early stages.

QuantaFlo HD is Semler Scientific's product that tests a patient's heart dysfunction by using a sensor to measure blood flow volume changes while the patient uses a whistle to simulate forced expiration. Users of the test are guided by on-screen directions throughout the process. QuantaFlo HD also ensures that patients produce enough airflow to achieve accurate results.

Semler Scientific's main competition for QuantaFlo is the standard blood pressure cuff ABI device. The traditional ABI device tests are typically operated by licensed vascular technicians. QuantaFlo tests can be performed by non-cardiovascular experts. QuantaFlo also has the advantage of testing patients who are not appropriate for the traditional ABI test (obese patients, some breast cancer patients, and those with non-compressible, hard, calcified arteries).

There is also another small competitor known as Biomedix who makes a cuff-free vascular disease diagnostic device. However, the global market for PAD is expected to grow at over 10% per year to reach $6.2 billion by 2028. So, multiple companies can thrive in my opinion even if new ones emerge with cuff-free solutions.

Positive Growth Outlook

Semler Scientific makes most of its money from the QuantaFlo PAD product. QuantaFlo HD doesn't currently generate significant revenue, but it is expected to grow over time in future years. In the meantime, the company's QuantaFlo PAD is expected to drive strong growth for SMLR.

Semler is benefitting from a peer-reviewed study from 2022 that demonstrated the effectiveness of QuantaFlo PAD in detecting increased risks for mortality and adverse cardiac events in individuals that were aged 65 and older living in a large metropolitan area. The individuals who had a positive test result for PAD were living with their condition without symptoms or a previous diagnosis. Here is what Semler's CEO concluded from the study from the Journal of Vascular Surgery:

"We believe this study supports the use of QuantaFlo® and the benefits that early screening for PAD brings patients and the health providers that care for them," said Doug Murphy-Chutorian, M.D., chief executive officer of Semler Scientific. "The study may drive further adoption of QuantaFlo® by existing and new customers."

Semler Scientific believes that the study helped drive growth for QuantaFlo PAD in Q3 2023. The company achieved a revenue increase of 16% to $16.3 million in Q3 2023. Looking ahead, Semler believes that revenue for Q4 2023 will be higher than Q4 2022. Semler also achieved an improvement in operating expenses to 61% in 2023 down from 68% from 2022. The revenue growth and reduction in expenses led to Semler achieving an increase of 50% in net income to $5.5 million in Q3.

This positive momentum is expected to continue as the peer-reviewed study brings increasing awareness to screen for PAD and HD using Semler's products. Semler can use this study for ongoing promotion/marketing of its products.

Semler's products can uncover health risks that were previously undetected where individuals have no obvious symptoms. Therefore, Semler's products can be a proactive approach to monitor a person's cardiovascular health risks so that patients can help prevent adverse events in the future.

Heart disease is the most common cause of death in the global population. Heart disease comprises one third of all deaths globally. Therefore, Semler's products can be an important screening tool to bring more awareness to individuals' state of heart-related health risks. This can allow people to help prevent adverse events before they occur by taking measures to improve their heart-related health.

The global PAD market is expected to grow at about 8% annually to reach $9.15 billion by 2031. This growth is likely to provide a strong tailwind for SMLR's QuantaFlo PAD product.

Semler Scientific is working on making QuantaFlo PAD a standard of preventive care through continued marketing campaigns. The company also plans to market QuantaFlo HD to existing customers. SMLR is striving to expand its customer base by adding medical centers, care providers, adding more VA (Veteran Affairs) customers, and growing in the self-insured retail and pharma markets.

SMLR is keeping its eyes on potential strategic partnerships and other opportunities to further expand its product portfolio. The company also maintains a commitment on R&D to upgrade existing products to maintain an edge on innovation and to help reduce costs for customers.

Valuation

SMLR has an attractive valuation as it trades at 13x forward expected EPS of $3.37 for 2024 and with a trailing price/cash flow of 16x. This is lower than the sector median forward PE of 18.7x and price/cash flow of 17.

SMLR is also trading lower than its peers in the Health Care Equipment industry with similar market caps. ZimVie (ZIMV) is trading 16x expected EPS of $0.68 for 2024. ZimVie's price/cash flow is much higher at 41. Accuray Incorporated (ARAY) is trading at 53x expected EPS of $0.05 for FY25 which ends in June 2025. Accuray is also trading with a higher price/cash flow of 37.

SMLR's expected EPS of $3.37 for 2024 would amount to a gain of 27% over the expected EPS of $2.65 for 2023. The company is expected to increase revenue at a strong pace of 11% in 2024. If this strong growth is achieved, Semler's stock has a good chance of achieving above-average growth over the next year.

If SMLR were trading at the sector median forward PE of 18.17x and the $3.37 EPS was achieved for 2024, the stock could trade at about $61.23 or 39% higher than the current price. Since SMLR has above-average growth, I think it is reasonable for the stock to trade above the sector median. So, a 50% gain could occur within a year given the low valuation and strong double-digit expected revenue and EPS growth. This scale of a gain looks reasonable if SMLR meets/exceeds revenue/earnings estimates for most quarters over the next year. The stock is already showing positive momentum which can continue if SMLR continues to achieve above average gains in revenue and earnings in 2024. A 50% gain would put the stock at $66 with a 19.6x PE.

The stock took a huge hit during the bear market from 2021 to the beginning of 2023. In addition to the bear market, SMLR also experienced a significant increase in operating expenses from 52% of total revenue in 2021 to 62% of total revenue in 2022. This may have led to an acceleration of the sell-off. However, the trailing 12 months has the operating expenses down to 57% of total revenue. So, profitability has been improving and should continue improving since the company has been streamlining operations and plans to reduce head count by 30%.

The improvement in profitability, the tailwind of the peer-reviewed study, strong double-digit expected gains in revenue and earnings growth, and the low PE are a recipe for SMLR's stock to make significant gains in 2024. SMLR's PE should be trading above the sector median as a result of the company's above average growth. Semler's strong double-digit expected revenue and earnings growth for 2024 is above the sector median expected forward revenue growth of 9% and forward EPS growth of 4%. So, I think it is reasonable for the stock's PE to increase higher than the sector median.

Technical Perspective

The stock's monthly chart (each candle represents one month) above provides a long-term multiple-year perspective. We can see that the stock price is bouncing higher from a support level in the $20s. The MACD indicator in the middle of the chart shows the change in trend back to positive as the histogram changed from red to pink and back to green. The blue MACD line also increased above the red signal line confirming the change in trend back to bullish. The purple RSI indicator at the bottom of the chart also looks bullish as it increased above its yellow moving average line.

The stock could eventually rise back to the highs with continued positive earnings reports and overall positive financial performance over the next few years.

Impressive Profitability Metrics

Semler Scientific tends to achieve high profitability metrics. For the trailing 12 month period, SMLR achieved a gross margin [GM] of 93%, EBITDA margin of 36%, and net income margin of 29%. This is significantly higher than the sector median GM of 56%, EBITDA margin of 5%, and net income margin of -5.5%. These high margins make every revenue dollar more valuable as it contributes to strong earnings growth.

Over the same period, SMLR had an ROE of 32%, ROIC of 24%, and ROA of 25%. Usually, figures above 15% for these return metrics are considered good. SMLR exceeds this hurdle significantly. This demonstrates SMLR's management effectiveness as it gets a great returns for its invested dollars.

Balance Sheet/Cash Flow

Semler has an impressively strong balance sheet with $37.5 million in cash & equivalents with zero net debt. SMLR has 7.5x more current assets than current liabilities and 8.5x more total assets than total liabilities for total equity of $70.7 million.

The company's strong cash position puts SMLR in good shape for investments into expanding the business. The highest line items on the liability side include $7 million in accrued expenses and $1.1 million in deferred revenue. SMLR is not bogged down with debt, which protects the company in the event of a financial downturn.

SMLR increased operating cash flow every year since 2015. Operating cash flow was $18.5 million for the trailing 12 months. This is higher than the $17.5 million from 2022. Over the trailing 12 month period, SMLR spent about $2 million on CapEx and $22.6 million in marketable & equity securities. The company had $12.6 million in free cash flow for the trailing 12 month period.

Overall, Semler's strong balance sheet and cash flow puts the company in a great position to grow the business. The company also has the financial flexibility to do share repurchases and/or pay dividends. However, SMLR hasn't historically paid dividends.

Risks to the Investment Thesis

The main risk for SMLR is increased competition for other non-cuff PAD tests which could take market share away or make it more challenging for Semler to grow. It is possible that other companies develop more attractive non-cuff PAD and/or HD tests which could compete with Semler Scientific. Biomedix is one company that sells a non-cuff PAD test that competes with Semler's QuantaFlo PAD.
SMLR obtains a significant portion of revenue from a limited amount of customers. If one or more of these customers switched to competing products, it could have a significant negative impact on Semler's revenue.

The stock could experience high volatility as seen in the stock chart. Sharp sell-offs could occur at any time on profit taking. So, investors should keep an eye on technical levels and lock in significant gains.

Semler Scientific's Long-Term Outlook

Semler's stock is poised for outperformance in 2024 as more awareness of the QuantaFlo PAD test travels to affected parties through the company's marketing efforts. The strong expected double-digit earnings growth has a good chance of driving the stock higher at an above-average pace from the below-average valuation.

Investors should watch for any new strategic partnerships that Semler forms, which could act as new positive catalysts in future years. The company stated in the recent Q3 earnings report that they may seek partnerships to help drive growth.

Currently, Semler has positive momentum in terms of revenue and earnings growth. The positive peer-reviewed study for QuantaFlo can help drive growth for SMLR as this is used as a key marketing tool. Growth from this study is likely to continue in 2024. SMLR is likely to get further tailwinds from the expected growth for the global PAD market. As I detailed in the valuation section of the article, a gain of over 50% for the stock within a year is reasonable.