908 Devices: The Bull Vs. Bear Tug Of War (NASDAQ:MASS)

Investment thesis

I have closely monitored the daily trading activity of 908 Devices Inc. (NASDAQ:MASS) since late Q4 when a quant that I developed uncovered a pronounced diversion between Wall Street quant ratings and Seeking Alpha quant ratings, which happens infrequently. I then performed analytical work to help me decide if the stock was a buy, sell or hold. The purpose of this article is to explain my investment thesis that I currently rate 908 Devices Inc. as a “hold” based on my financial and operational review.

About the company

908 Devices Inc. was founded in 2012 and their corporate headquarters is located in the Innovation District (F/K/A the South Boston Waterfront) of Boston, a vibrant ecosystem of entrepreneurship and innovation. The company provides various purpose-built handheld and desktop mass spectrometry (Mass Spec) devices to interrogate unknown and invisible materials in life sciences research, bioprocessing, industrial biotech, forensics, and adjacent markets. For the nine months ended 9/30/22, their revenues were derived from the following three products:

• 82.5% from the MX908, which launched in June, 2017 is a handheld, battery-powered, Mass Spec device designed for rapid analysis of gas, liquid and solid materials of unknown identity.
• 12.3% from The Rebel, which launched in November, 2019 is a small desktop analyzer providing real-time information on the extracellular environment in bioprocesses at a price point well below similar products offered by their competitors.
• 5.2% from the ZipChip Solution which launched in March, 2016 is a plug-and-play, high-resolution separation platform that optimizes Mass Spec sample analysis.

Here is a link to the company’s 1/17/23 investor presentation which provides detailed information about the company.

IPO common stock offering

There was much fanfare associated with the IPO of 908 Devices Inc. in December, 2020. The deal was upsized to 6.5M shares of common stock at $20 per share, and the underwriters fully exercised their option to buy an additional 975K shares from the company. The net proceeds from the offering were $136.6M after deducting underwriting discounts and commissions and other offering costs. MASS closed at $49.00 on volume of 4.2M shares on 12/18/20, its first day of trading. Demand for the stock continued to increase, and MASS closed at $75.00 on 2/16/21. Now let us discuss “the rest of the story.”

Stock performance

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As the above chart shows, MASS has been on a downward trend for two years, and closed at $10.15 on 2/12/23, which is ~50% lower than the IPO price of $20.00. On 11/15/21 (11 months after the IPO) the company completed a second offering of 3.15M shares of common stock at a price of $32.00 per share. The net proceeds from the offering were $94.4M after deducting underwriting discounts and commissions and other offering costs. MASS has decreased 68.3% since the most recent offering. In my view, it is unlikely that 908 Devices Inc. will be able to access the equity market in the foreseeable future based on the suboptimal performance of the stock, which is a function of their poor results of operation. That would leave the debt market as their only access to the capital market.

The bull vs. bear tug of war

Wall Street’s rating for MASS is “strong buy” based on a quant score of 5.00. The median price target for MASS is $17.00, or 67.5% higher than the $10.15 close of 2/10/23. In sharp contrast, Seeking Alpha’s rating for MASS is “strong sell” based on a quant score of 1.37. In my view, an anomaly of this magnitude is what helps make a market.

Cathie Wood and 908 Devices Inc.

ARK Investment Management LLC is the largest institutional holder of MASS with an 11.68% ownership interest as of 2/10/23 per cathiesark.com, which I highly recommend for those who would like to follow the daily positions, trades and weights in Ms. Wood’s $14.8B portfolio. In my view, ARKs interest in MASS has stabilized the stock price to a certain extent. But keep in mind that as an acknowledged advocate of disruptive technology, Cathie Wood has a long-term view with substantial financial firepower to withstand prolonged market volatility. For investors who may be more focused on the 908 Devices Inc. path to profitability, the present environment is especially challenging because Mr. Market has essentially shunned companies with mounting losses.

Q3 Form 10-Q

Key takeaways from my review of 908 Devices Inc. three core financial statements as of 9/30/22 are as follow:

Condensed Consolidated Balance Sheet

• Cash of $197.3M
• Current ratio of 11.7
• Quick ratio of 11.0
• Debt-to-equity ratio of 0.08

Condensed Consolidated Statement of Operations

• Revenue increase of 33.5% YOY
• Gross margin increase of 3.6% YOY
• Total operating expenses increase of 38.3%
• Loss from operations increase of 35.1%

Condensed Consolidated Statement of Cash Flows

• Net loss increase of 27.1% YOY
• Stock-based compensation expense increase of 219.0%
• Acquisition, net of cash required of $13.8M
• Cash decrease of 13.6% YOY

Recap

As of 9/30/22, MASS has a healthy condensed consolidated balance sheet. The condensed consolidated statement of operations also has some strong attributes as the gross margin of 57.1% is much higher than the sector median of 48.9% and also is the second highest in their Seeking Alpha peer group. However, a “red flag” of grave concern is that the percentage increase in operating expense of 38.6% YOY is more than the percentage increase in revenue of increase of 33.5% YOY. In addition, although 2022 YTD revenues are more than 2021YTD revenues, the 2022 YTD loss from operations is more than the 2021 YTD loss of operations. The leadership of 908 Devices Inc. needs to promptly address whatever root issues are driving this increasing loss or else risk losing investor support. Another pressing issue is that $3.6M of the $5.1M (70.6%) increase in net loss YOY is attributable to stock based compensation, a complex and controversial accounting topic I have written about here.

2022 pro formas

On 11/14/22 908 Devices Inc. reported Q3 results of operation and revised their 2022 guidance to $46M -$49M vs. consensus $53.58M, This is a material change, which rarely happens 11 ½ months into the fiscal year. Predictably, the market has reacted negatively to this, and 908 Devices Inc. stock has decreased from $12.48 to $10.15, or 19.7%. The company will need Q4 revenues of $12.3M to reach $47.5M, which is the midpoint of the range. This would represent a revenue percentage increase of ~12.5% YOY, which would be a sharp decline from the 56.9% revenue increase in 2021 and the 49.4% revenue increase in 2020. Based on my analysis, it appears likely that MASS will report a record loss in excess of $32M for 2022 when they report Q4 and full year 2022 financial results, the date of which has not yet been announced.

Size matters

In the mass spectrometry market, smaller is better. And the MX908, the company’s flagship product, “the first truly handheld mass spectrometry device” has an impressive record in the opioid crisis, counterfeit drugs, and hazardous materials operations as shown in this product video. I believe there may be an untapped market to use the MX908 more extensively in border patrol and airports, both domestically and globally.

New product

On 1/17/23 the 908 Devices Inc. announced the launch of MAVEN, a glucose & lactate measurement device and reportedly plans to introduce another new product in 2023. As a result, it would appear that there may be significant increases in both product and service cost of revenue as well as operating expenses typically associated with a new product launch.

The CIA connection

908 Devices Inc. is listed as a portfolio company of In-Q-Tel, which is a not-for-profit venture capital firm based in Arlington, VA that Wikipedia says “invests in high-tech companies to keep the Central Intelligence Agency, and other intelligence agencies, equipped with the latest in information technology in support of United States intelligence capability.” Not surprisingly, there is a dearth of information regarding this relationship either at the 908 Device Inc. website or in SEC filings, perhaps because of national- security concerns. For readers who would like to learn more about the In-Q-Tel model, here is a link to a good read on the subject.

908 Devices Inc. fun facts

• About 40% of employees have advanced degree in the life science or related fields
• The company name is derived from a term that is likely understood only by those proficient in ion trap mass spectrometers
• Work/life balance is rated 4.2/5.0

As an aside, I formerly worked in the Innovation District and I encourage visitors to Boston that the Flour Bakery location on Farnsworth Street is well worth a stop, to eat and eavesdrop. Joanne Chang, the founder of the company studied astrophysics at Harvard University before earning her degree with honors in applied mathematics and economics. How is that for a fun fact?

Conclusion

Based on the foregoing financial and operational analysis, 908 Devices Inc. faces many serious challenges going forward, including but not limited to continual mounting losses, a depressed share price and a bloated cost structure. Due to the protracted poor results of operation, IPO investors have suffered a ~50% loss in value. Investors in the 11/21 $32 common stock offering have fared even worse as MASS has declined 68.3% since that offering. There has been a sharp decline in sales growth, and even though the new product has been introduced in 1/23, this may also result in sizable customer acquisition costs. Perhaps the most telling issue is that the company has suffered reputational damage by their inability to provide reliable guidance. In my view it is incumbent on the management team of 908 Devices Inc. to do a deep dive into how they can achieve profitability in this challenging economic environment and clearly communicate this message to shareholders at the next earnings call.