Silk Road Medical: What A Road It Has Been (NASDAQ:SILK)

Early in 2021, I concluded that Silk Road Medical, Inc. (NASDAQ:SILK) was growing along. I have been following this medtech name, which is tackling the treatment of strokes since it went public early in 2019, in what was a successful public offering. Fast forwarding nearly three years in time, shares have been trading largely stagnant while growth has been solid, which creates a much better risk-reward here, as Silk appears to be a solid secular growth play.

A Stroke Play

Silk Medical Road is a medtech business which focuses on the development of devices which both reduce the risk and the impact of a stroke. The company has developed the “TCAR” approach, transcarotid artery revascularization, which the company hopes becomes the standard in the field.

This method is based on a minimally invasive direct carotid access in the neck, to thereby protect the brain. With the company´s products being the only FDA-approved technique based on TCAR, and this technique delivering on a reduced chance of occurrence of a stroke and better mortality profile, the future looked promising.

Some 4,600 TCAR procedures were performed in 2018 as the company generated $35 million in revenues in the process, albeit accompanied by a $21 million operating loss. Shares rallied to $35 on the first day of trading, pushing up the valuation to a billion, at around 28 times sales, a multiple which fell to 20 times sales based on an annualized run rate of $46 million in revenues per annum at the time.

In the first year of trading shares were stuck in at $30-$50 range as the company ended the year with a run rate of $75 million in terms of sales. Shares fell to $20 amidst the outbreak of the pandemic as the impact of the Covid-19 crisis was relatively modest. After all, second quarter sales for 2020 fell a percent, but growth returned from the third quarter on, at a respectable pace.

Shares rallied to $62 in February 2021, pushing up the enterprise valuation to $2 billion, while sales ran at a rate of $80 million per annum, pushing up multiples to 25 times sales again. That was a bit rich, even as it was obvious that the pandemic held back revenues at the time, but still I was not compelled just yet.

Re-Rating – Both Ways

Truth is that I am happy that I urged a word of caution at $62 about fifteen months ago. After all, shares are now down to $44 at the moment of writing, but shares have actually recovered in a rather spectacular fashion from a low of around $30 a couple of weeks ago.

The company saw somewhat of a mixed year in 2021. First quarter sales rose 16% to $22 million as operating losses were stable at $10 million and change. Second quarter sales were up 75% to more than $26 million, as the percentage growth acceleration mostly stemmed from easy comparables as operating losses still came in at $10 million. The third quarter was a bit puzzling, with revenue growth slowing down to 23% as revenues came in at nearly $25 million, marking some sequential revenue declines as operating losses inched up to $13 million and change.

Towards the end of February, the company posted solid fourth quarter results with revenues up 34% to $28 million and change as operating losses inched up to $14 million. Full year revenues were up a by a similar percentage to $101 million, with operating losses increasing in a modest fashion to $47 million.

Valuation Comes Down

Right now, shares trade at $44 per share, as 35 million shares outstanding now award the company a $1.54 billion valuation. This includes a net cash position of around $60 million, for a $1.48 billion operating asset valuation. This means that sales multiples have compressed to around 13 times annualized sales, with 11-12 times forward sales at a midpoint of $129 million for the year 2022.

While losses are still substantial, I am upbeat on the fundamental story, as the TCAR market share has rapidly grown to 8%. Growth in this market, other applications, and international markets reveal a $5 billion global market opportunity. This is all the case while there has not been any price growth, indicating that the quality of growth is strong.

Hence, the 20-25 times forward sales multiple has imploded to just 11 times, and that is even after a nearly 50% recovery in recent weeks. After all, the operating asset valuation came in at around a billion a few weeks ago, at just 8 times forward sales.

Given the strong outlook in the long run and the potential for margins to turn positive and become substantial over time, I am slowly getting upbeat, although I am not chasing the shares here after a strong recovery in recent weeks. Given the solid 25-35% organic growth rate (excluding pricing), I think that a high single-digit sales multiples is more than warranted. This makes me a buyer if shares were to retreat to the mid-to low thirties, as they look like a decent play, despite a rocky road.