Inogen: Little Breathing Room (NASDAQ:INGN)

In the summer of 2020 I called Inogen (NASDAQ:INGN) a boom and bust story, after quite a few turbulent years in which shares exploded from $30 in 2016 to $300 in 2018, to come back all the way to $30 at the time.

After a more modest momentum run last year, shares are back to this mark again, as Inogen continued to face execution issues, casting a shadow on the long-term growth story.

A Recap

Inogen is based on the idea that the 30 million people Americans suffering from COPD, as well as many overseas patients, should obtain a better and higher-quality way of care, in this case oxygen, through both portable and stationary oxygen delivery machines.

Retailing around $2,000, the device is certainly not cheap, but it does not command professional equipment device prices as well. The company has grown from a mere $10 million in sales to a $350 million sales number in just about a decade´s period of time. Investors were wildly extrapolating this growth with 22 million shares representing a peak valuation at $6.6 billion at $300 a share, equal to nearly 20 times sales, all while earnings trended at just a dollar.

This peak happened in 2018 and with sales being flattish, shares took a diver. As it turned out the company reported $362 million in sales in 2019 and guided for 2020 sales between $385 and $400 million. The issue is that GAAP earnings for the year were cut from $26 million to $16 million, at just $0.70 per share, as earnings provided little power to provide support to the shares, certainly not at valuations above the $100 mark.

Holding nearly $10 per share in net cash and with share down to the $30 mark that summer, while the company might play a role in the pandemic as well. After all, Inogen is all about administering oxygen, key in fighting the pandemic as, or better said help patients suffering from Covid-19.

Given the protection provided by the net cash balances and sales multiples having dropped to 1 times, I was turning upbeat, albeit that the situation was highly uncertain with the pandemic of course.

What Happened?

I actually held a small speculative position which I cashed out at $50 as shares rallied back to the $80 mark in the summer of 2021, by which I have lost track of Inogen already. Ever since, shares are down meaningful again, now trading at just $27, near their lows.

The rise in the share price in 2021 was somewhat surprising as 2020 turned out to be a very soft year. Full year sales fell 15% to $308 million as the company saw an operating profit of $20 million turn into a loss of $12 million, as little comfort could be deduced from these results. Given the uncertainty, the company failed to issue a guidance for the year.

Part of the enthusiasm came as the situation stabilized, although shares had fallen to the $30 mark already early in 2022 when the company reported a 16% increase in full year sales to $358 million, albeit that growth slowed down quite a bit in the final quarter. With the recovery in growth came modest profitability again, as a full year operating profit of $9 million was squeezed out, driven by growth in the rental business, direct-to-consumer business and international activities. With the company keeping its share count flat at 22 million shares, while the net cash position only improved further to $245 million, fundamental balance sheet support was still there.

In May, the company posted a 7% fall in quarterly sales to $80 million as the company was facing supply chain shortages and huge pressure on gross margins, with operating losses reported at $13 million, which compares to a first quarter operating loss of $2 million in the year before, with losses hurting net cash balances as well.

Second quarter sales rose 2% to just over $103 million. While the operating loss of less than $3 million marked a huge improvement from the first quarter, it was down meaningfully from a near $12 million profit in the year before. This is very discomforting, certainly as the company guided for third quarter sales between $97 and $100 million, although this actually marks the expectation of 4-7% growth.

What Now?

While the current soft performance is largely to be attributed to inflation and supply chain issues, the underlying trends look sound, but the reality is that total revenues are flat for years now, so despite the valid current reasons, there are real execution issues as well.

Fortunately, net cash is still very strong, providing support for Inogen to work out its growth issues, but moreover its margin issues. In the meantime, the company is undergoing a huge strategic change as well, moving away from wholesale market to direct-to-consumer sales, rental options and focusing on international growth, as all these moving items do not make it easier for the company to become more profitable.

Right now there are few green shoots, other than hoping for supply chain issues to blow over, albeit that a current $400 million enterprise valuation does not reveal high hopes for (imminent) profitability as well. Hence, this remains a speculative buy; yet, unlike 2020, I see more structural performance issues at hand, which prevents me from getting too upbeat here.