ZYXI: A case study
ZYXI: A case study
ZYXI was one of the biggest winners over the last five years nearly returning 100x: what did it look and feel like along the way?
What’s the goal here? History is a great educator for both the present and the future. However, abstracting the minute fluctuations and significant events along the way can remove the volatility and feel of holding such a stock. Inspired by this tweet
I wanted to learn what a winning stock felt like in real time. Retrospective analysis abstracts the feel of the stock in the moment. I tried to emulate the year to year feel of the company using a combination of significant events and quantitative metrics.
I’ll go through a brief business description before describing the company situation before 2017 and at the end of each year. I’ll give you my assessment on if it’s a buy at the end of each year.
Summary:
Zynex started as a bankrupt, defunct company trading Over-the-Counter with multiple red flags. The departure of key competition allowed them to capture market share while the anti-opioid zeitgeist let them keep it. They found a loophole by overbilling insurance companies, but the stickiness of healthcare and abstraction from the end customer allowed them to sustain revenue growth. The price moved in waves as people discovered the stock, it was up-listed, and eventually captured by retail traders. Although valid short reports were published nearly 3 years ago, those thesis took 3 years to play out with multiple people dunking on the author along the way. I would likely not have bought Zynex stock, but the financials were phenomenal in 2017 when their competition left the market. They traded at less than 1x sales making it a value stock which has rewarded shareholders nicely over time. As Tobias Carlisle points out (57:00), "if it gets too cheap, I'm gonna buy it". Every company has a price: that is value investing. Timing the market swings in Zynex would have been key to maximize returns since the stock violently moved up in short periods of time.
Business description:
Zynex markets an electrotherapy device for pain management: the NexWave, a trimodal electrotherapy device, which can do interferential current stimulation (IFC), neuromuscular electrical stimulation (NMES), and transcutaneous electrical nerve stimulation (TENS). All three are different ways to apply electrical currents to the body used for different indications as explained here. TENS is for pain relief, NMES is for rehab, and IFC is for acute pain. TENS devices are fairly commoditized with a number of copycat products on the market. However, each TENS unit can have a different power level, with prescription TENS units often being more powerful than over-the-counter (OTC) units (similar to prescription pain killers vs. taking ibuprofen). Unlike most pain killer drugs, there is no consensus on the effectiveness of TENS for pain relief (link), though it’s non-opioid nature increases the marketability. Academic literature suggests benefits from TENS stimulation may diminish over time, with some patients experiencing “worsening pain.” In addition, “One universal agreement is that TENS is not a cure for pain conditions or syndromes.” Zynex sells the device, the electrodes, and batteries (a regular 9V battery) used in the device. Patients are prescribed the device from their doctor and use it at home. The product is auto-billed based to their insurance if covered. The business itself is one product and straightforward. Although they do market a ‘blood monitor’, it was not approved in 2017 and still has no significant sales after 1.5 years on the market.
MicroCapClub Thread: The goal of this exercise is to understand the journey of a multi-bagger: not to judge it in hindsight. Hindsight if always 20/20 with uncertainty often abstracted by long time periods. ZYXI is unique because it has a previously active MicroCapClub thread on the company. It’s one thing to talk to investors about a company’s history but seeing real-time reactions from savvy investors allows one to better judge the investors’ mindset. It was initially pitched to the club in 2011 as a ‘brute sales force story’ since the product has ‘no advantage over the competition.’ At the time, a new blood monitoring device is discussed by management, but no results yet from the product. After missing multiple guidance estimates, investors are exasperated with he company realizing ZYXI has minimal operating leverage, so ‘they spend $1 on SGA for every $1 of Revenue’. I’ll continue to reference any Microcapclub (MCC) comments for the rest of the writeup.
Let’s start with the situation in 2017: Zynex stock is at .30 after-sales dropped off in 2016 due to insurance reimbursement issues. Liquidity issues led the founder to take on personal debt to make payroll. They weren’t profitable and had repeatedly overpromised and underdelivered. It got ugly in 2014 with the ousting of all board members by the CEO and >50% shareholder, Thomas Sandgaard. In 2016, Zynex shut down an adjacent pharma business, but a major competitor left the TENS market opening a $250m market opportunity for the core business. In fact, both major competitors, EMPI and RS medical, closed up shop (link, link) due to dubious billing practices and ‘assumptive selling’. EMPI eventually pays a multimillion dollar fine. Zynex hires the competition’s sales team to take their market share. The company ends 2016 profitable and growing though still has liquidity constraints. No transcripts exist at this time, but the development is noted in the 2016 10k.
Our largest competitor, Empi, announced the closure of their Empi electrotherapy division. Empi previously held a large share of the electrotherapy market with approximately $250 million in annual revenue…. We have engaged, both as employees and contractors, 74 former Empi representatives. Our orders have increased from a monthly average of 1,100 in 2015 to 2,100 in 2016.
2017:
Significant Events:
A CEO letter to shareholders in April is highly bullish on the business as they continue to “work on the blood monitoring device”.
They get a new CFO in June of 2017. A bullish Seeking Alpha Article was posted in August (link).
Another research report with w $4 PT was released in October.
They announced a 2 million share buyback program in December.
Looking at the 10K, the sales shift to majority Supplies rather than Devices, indicating high utilization of the product. Night market Research has a good explanation of this in his short report from 2020 (link). They’re up 40% after reporting 2nd Quarter earnings in August.
It’s a remarkable shift to a more profitable revenue stream, but there is no mention of this shift to supply revenue in the MCC thread or any earnings releases. They talk around it with discussions of “improving collections and cost controls”, but no direct mention. Remember, the supplies are commodity electrodes and products, thus it’s suspicious they can make this much money for them. Even though it wasn’t explicitly on the thread, MCC investors weren’t comfortable with a lack of clear explanation on the turnaround. Still it’s dirt cheap and management tells a good story. At points, they can seem delusional aspirational since they want to shift the “paradigm of pain relief” with a commoditized, controversial TENS unit.
I likely would not have bought the stock in 2017. It has liquidity issues, a promotional CEO and little competitive advantage. I would be perplexed by their recent revenue growth instead of excited about it, though it can be explained by the departure of competition.. However, based on the Q2 results, it turned profitable and trades at a 5x annualized P/E. It’s ridiculously cheap for the growth. If lucky enough to see the company turn profitable with quarterly results, this was a great time to buy early in the year.
Side Note: I suggest reading through some Glassdoor reviews from 2017. There are quite a few for such a small company implying people feel strongly both for and against their jobs. Reviews range from unethical billing to excellent sales incentives.
2018:
Significant events:
In May, they announced another $2 million share buyback program after repurchasing 500k shares from the previous buyback program.
Inklings of Sell-Side coverage show up on the first-quarter earnings call in May with five total analysts vs. 0 on the Q416 call one year ago.
In November, they also announced a special .07/share dividend with Q3 earnings.
The most impressive news….. is a lack of significant news. The company sustains revenue growth, explained by competition closing shop and the billing team knowing “what insurance companies need...in terms of working the files” (according to the CEO). It’s tightly held (SandGaard holds 50%) and on the OTC markets so liquidity is constrained. Another MCC stock pitch was posted in December 2018. The pitch essentially says they are growing 50%/year while priced at <10x EV/EBIT. The stock price ends the year flat, but revenue growth is still strong.
Shares peaked early in the year and couldn’t match the previous year’s growth levels thus selling off. Each quarter, they beat revenue guidance and raise estimates. Each quarter’s movements isn’t immediate but takes time as constrained liquidity leads to large, volatile movements. It’s still darn cheap for the growth. As a quality growth investor, my hesitancy to invest in companies whose thesis is “it’s cheap” could be holding me back! Everything is a good buy at a price. It’s flat for the year after running up significantly early.
2019:
Significant Events:
They uplist to the NASDAQ in February and more investors are picking up shares on MCC. On the news of uplisting to the NASDAQ, the stock jumps
According to the CEO in January 2019, insider ownership is 78% as a ten-year shareholder holds 24% of the shares (yet don’t show up in the filings). The company’s sales force and billing team drive their growth. Their goal is to increase the sales team from 144 to 400 eventually.
They filed a mixed shelf worth $100m to offer shares in March.
In June, the stock drops after the CEO files to sell 16m shares (his whole stake) after selling 300k worth of shares earlier in the year and a total of 600k shares for the year. Lots of investors recognize potentially shady dealings with a comment on a seeking alpha article stating, “ZYXI is dependent on rent-seeking and making sure insurance/government covers their marked-up product via relationships” (link).
One can see a slew of seeking alpha articles on the company starting in Mid-April with a total of 10 pieces from April to December (link). Only one is bearish, which I highly recommend (link). Night Market Research does extensive research into the pricing model of Zynex, which relies on automatic deliveries of commodity supplies like batteries and electrodes, but the thesis underlying the article is the commodity nature of the device.
Each quarter is a beat and raise with full year results at 45 million and guiding to 80 million. However, device sales still have not reached 2016 levels meaning they have taken share from competition yet still have not sold as many devices. The stock trades on the uplisting news early in the year (up significantly) and insider selling later in the year (mainly the CEO). It doubles through the course of year, but not without volatility moving 20% up to down on little no news.
There are a number of bullish articles published on the company. Regarding the bullish reports, it’s impressive to see sentiment follow price. Each article was published AFTER it had hit $7/share and cites competitors leaving the market as a tailwind. For keen observers, these articles are four years past due since those competitors left the market years ago.
2020:
Significant Events –
Their 1Q earnings are another beat and raise in April. 2020 guidance was 7% more than original estimates. At all-time highs, they file to offer shares.
TRICARE (representing 10% of revenue) drops coverage for TENS units in May, the 1st large health plan since Medicare to drop coverage. This follows the trend from the old pharma segment at Zynex selling pain creams as TRICARE was the first to cut reimbursement.
In October, the stock was off 25% after disappointing results, likely due to insurers catching onto their pricing model.
Insider selling continues through the year, but some are still buying on the way down (link to popular Twitter account, October 2020). On the surface, it's a fast-growing MedTech company, but digging one step further reveals a DME supplier trading at >1x Sales extracting value rather than providing it. It doesn’t take much digging to reveal their product isn’t unique, especially with well researched short reports out there. They hit 400 salespeople by the end of the year but fail to meet guidance. Sandgaard funded a personal purchase of a struggling soccer franchise in September 2020 (please check out his personal website) through selling shares. Nothing wrong with taking money off of the table, but odd to buy a struggling soccer team. The MCC thread stops in November of 2020, with most people selling after it hits 20+,but some buying on the way down. After reading the seeking alpha piece by Night Market Research, investors are concerned with possible abusive pricing along with prior history of the company. It’s a volatile stock doubling from March to July and then being cut in half by October. Surprisingly, COVID didn’t seem to affect their growth drastically.
Nothing’s changed in my eyes. It’s still a commodity product with a promotional CEO and little to no pipeline. The short reports validates investor discomfort. Still, it’s cheap on a trailing basis and people have been calling for their downfall for quite a while. We can see it taken for a ride after COVID hits as retail investors really take hold of the name. Looking at the history of the stock, it’s quite amazing how the trading dynamics were disconnected from potential forward looking results (such as insurance dropping coverage).
2021:
Significant events:
February Results are at the low end of guidance with a forward guide to $135-150m FY sales and 15-25 million EBITDA, representing 70% growth. They're at 500 sales reps and expect 600 by the end of the year.
A $10M share buyback program is announced in March of 2021. It's an odd dynamic where the CEO sells shares while the company is repurchasing them. The CEO acts ridiculous after buying the soccer team, dropping loads of money into it.
Guidance this year is continuously adjusted downward with an insurance cut by UNH as the nail in the coffin on December 10th. They limit the number of electrodes per month to 2, which could kill Zynex's profitability. UNH only changed practices after receiving complaints from patients (happened in May 2021, here). Even after the May update, no analyst asks about the insurance cut on any of the earnings calls. UNH will increase premiums until the cows come home, but they’re not in the business of paying more money than necessary.
In December, they bought another company in what seems like a futile attempt to expand their services.
We see another volatile year with swings up and down as people wait on results. Each quarter is unpredictable, but the trend is downward overall. Don’t buy a value stock under the impression is a growth stock.
Would I buy it? So here we are at the end of 2021/beginning of 2022 where the company is up 20x+ in five years, but down 67% from the peak. They’re cutting the sales force and didn’t meet guidance. Their fluid monitoring system is FDA approved since February 2020 and still hasn’t generated any sales. The people who pay for the product (insurance companies) are aware of Zynex’s runaround. The jig is up. Regardless of how cheap it is, I expect sales to drop steeply while Sandgaard squeezes every ounce of money out of investors to fund his sideshows.
Lessons Learned:
I believe Zynex is an unethical company with possibly fraudulent billing practices, but there are still lessons to learn. Although, I may have missed it (and would consistently miss it everytime), there are some lessons.
Company discovery matters. being first to a stock matters especially for short term trades
Profitability solves a world of issues.
Healthcare is sticky. Zynex had no moat, yet the stickiness of the device and sales reps allowed them to continue to grow.
Invest in companies not taking market share.
If you’re exploiting a loophole, people will eventually catch on. The jig is up for Zynex. But maybe not as fast as people expect.
Price drives narrative. Bullish articles only showed up AFTER it hit $7/share. Even the short report came after the initial price spike.
I suggest reading Night Market Research’s series of articles of company which chronicle the saga well. I find it fascinating how a company with severe liquidity issues can turn the ship around so quickly with the necessary catalyst and hustle. You can’t argue with Numbers, but there needs to be substance behind those numbers.
Thanks once again for a microcap medtech + memes.