Cue Health: Tough Road Ahead (NASDAQ:HLTH)

The Investment Thesis

Cue Health Inc (NASDAQ:HLTH) operates in the United States. They are described as a healthcare and technology company that both designs and develops diagnostic platforms. These are then used for tests on individuals, entries, and even healthcare providers. Their customer base is broad and the TAM is large. They have by this point managed to develop a large selection of products like Cue Wand, Cue Health Monitoring Systems, and Cue Cartridge.

I don’t think investing in Cue Health is a very good idea. With so many losses each quarter I fail to see any catalyst that could shoot them back up to profitability. Unless they find new revenue streams the future seems very dark. I would sell any shares in the company right now to limit my risk exposure.

Last Earnings Report Highlights

Even though the company managed to exceed expectations in terms of revenues in the latest earnings report, the YoY decrease is staggering. In the third quarter of 2022, Cue Health had $66 million in revenues, with around 94% of that coming from the private sector. Compare this to 2021 revenues of $223 million and you wonder why people would ever buy into the company.

The management noted that higher-than-expected revenues in the quarter came from increased orders of Covid-19 testing from already existing customers.

Right now the company is in a very difficult situation as the operating expenses are higher than the revenues they are generating. This led them to lose $66 million in the last quarter. With the cash sitting at just over $300 million the company technically only has 5 more quarters left before they run out of money unless they heavily dilute more shares.

The management is not as bearish as I am on the future of the company. In the earnings report, the CEO said, “We continue to make significant progress advancing our pipeline of future tests”. But the shift isn’t coming fast enough and with both lower revenues and higher costs of revenues I don’t believe in a fast enough change. High costs of goods and supplies are most likely going to stay in the healthcare sector, something that bigger companies are feeling too.

Sector Outlook

Cue Health is a part of the healthcare equipment industry where they develop diagnostics for a number of customers. In 2021 a large amount of revenue came from Covid-19 tests which helped skyrocket their revenues, just like many other companies. But the company is now trying to diversify itself and find more revenue streams to have a steadier base to stand on.

Looking at the industry as a whole there is growth ahead. The healthcare equipment industry is expected to reach around $964 billion by 2030. This would indicate an annual growth of 6.99%.

Covid-19 is likely something we will have to live with for many years ahead. In the meantime, Cue Health should have some revenue streams from this as they continue to supply customers with their at-home tests. But I think it will be crucial that they have diversity as their revenues cannot solely depend on one thing.

Competition

As time goes on more and more companies will enter the space and take over covid-19 testing. Some notable competitions for Cue Health would be Senzo, Ellume, and Viome. These are companies also working with developing and selling biomedical testing products.

The biggest risk in my opinion for Cue Health is that the market they are in will be shrinking as Covid-19 starts to be less and less common and people aren’t prioritizing getting tests for it. This will heavily hurt the company as the small space could be dominated by much bigger companies that have the capital to spend and take over completely.

The Balance Sheet

The financial state of Cue Health is in my opinion worrying. I mentioned previously that they are losing a lot of money each quarter. If this keeps up they will use up their remaining cash in 5 quarters. This has created a lot of worry about the company and it’s no wonder the share price has plummeted so much because of it.

In the latest quarter, the company had $300 million in cash, a decrease of 25% YoY. The current operating expenses are in the last 12 months $286 million. I have a hard time seeing a case to be made that the company won’t run out of cash before they find more revenue and a better margin.

Thankfully the company doesn’t have any debt they need to pay off and all the cash will instead go towards the company keeping up operations.

The company holds a lot more assets than liabilities right now. The ratio between them is 3.5 in the latest quarter. A large portion of the assets are in both cash but also in properties. What this has led to however is a return on assets of -15% for the company. As they have much less revenue now, holding this much of assets in properties is starting to dig into earnings as the operating expenses remain high.

Cash flow remains negative for the company. With negative cash flow like this, the risk for share dilution continues to be very high. As I mentioned before, the company doesn’t have any debt to pay off, and instead share dilution would go towards keeping up with operations.

As we can see here, share dilution has been very common in the last few years and I think it will continue to be so as well. This should be enough to put off most investors from buying into the company. The risks are extremely high when you see share dilution this high. All in all the company has a worrying financial state where they will run out of cash in less than 2 years. Unless there is a turnaround soon, the future seems very bleak in my opinion.

Valuing The Company

Right now I don’t think it’s very appropriate to make price targets for the company. They have seen staggering drops in revenues as the demand for their product has remained as high as in 2021. Perhaps they just had a fluke and therefore the future is both bleak and uncertain.

Looking at some valuation metrics, the return on assets has me worried. I mentioned before they are almost losing 15% of their assets because their properties are becoming very expensive to keep up.

Since the company is also losing money each quarter you wouldn’t be buying the company based on fundamentals. Until I see a positive bottom line investment in the company is at high risk of losing value.

Going forward I hope that the management can try and focus more on other sources of revenue and perhaps further invest in diagnostics. This shift could prove to be good for the company if the manages to find a profitable way to set it up.

Conclusion

It seems that Cue Health had a fluke in 2021 as massive amounts of revenues come in thanks to their Covid-19-related products. In the future, they need to find new revenue streams in order to keep investors believing in the company.

What worries me is the low amount of cash they have. They will run out of cash within 2 years if the current operating expenses keep up. This is enough for me to definitely sell any shares in the company.

Even though the industry they are in is expected to grow YoY I don’t think the same will happen to Cue Health. I want to see new revenue streams for them and management able to navigate successfully as they are still losing money each quarter. The potential for share dilution is also something that puts me off. I think that will continue to happen as the company becomes more and more desperate to raise cash.