1 Top Growth Stock Down 50% to Buy After Its Recent Pullback

TransMedics (TMDX) is on a mission to revolutionize the organ transplant process. Thanks to the company’s Organ Care System (OCS), TransMedics’ equipment essentially keeps donated livers, hearts, and lungs “functioning” as they are en route to their donee.

Powered by this incredibly important capability, the company’s OCS has been rapidly adopted by transplant centers across the United States, as evidenced by TransMedics’ revenue rising 13-fold in just the last three years.

After purchasing shares just over a year ago, I knew that these remarkable growth rates would undoubtedly make owning TransMedics a wild ride. And the stock has not disappointed. After the promising growth stock nearly tripled in price in less than a year of my owning it, it plummeted 50%, leaving me slightly above my original cost basis.

However, in the year that all of these stock price movements occurred — only to end up barely above where it started — TransMedics has become a more robust investment, in my opinion. While the company’s recent third-quarter results were underwhelming, I believe the following three reasons make TransMedics a top growth stock to buy and hold for decades after its 50% pullback.

Reinventing the organ transplant industry
After TransMedics’ stock plummeted 30% overnight despite delivering 64% sales growth year over year, the company became one of my favorite dollar-cost averaging candidates at the moment for these reasons.

1. Growing market share in an undeniably important market
Vastly superior to traditional cold-storage methods used in the organ donation process, the company’s National Organ Care System Program has helped TransMedics’ market share balloon over the last few years.

In 2022, there were roughly 16,000 heart, lung, and liver donations in the United States, of which about 1,000 were done with TransMedics, giving it a 6% market share. Now, just two years later, management believes the company is on pace to do about 3,750 transplants in 2024, which would triple its market share to around 20%.

These stellar market share gains in an organ transplant industry that has grown by 4% annually since 2010 combine for a compelling long-term growth story for the company. Furthermore, thanks in part to the improved efficiencies from offerings like TransMedics’ equipment and burgeoning logistical network, organ donations have seen accelerating growth recently, with heart and liver donations rising by 12% in 2023.

Despite this steady growth historically, liver and heart transplants in the U.S. declined 5% from the second quarter to the third quarter, while lung transplants dropped 3%. Mirroring this somewhat surprising downturn, TransMedics’ U.S. revenue fell 3% sequentially from Q2 to Q3, prompting the market’s harsh reaction.

While disappointing, I don’t believe it is time to start sounding the alarm after TransMedics merely maintained its market share over a 90-day time frame. In fact, with management reaffirming its ambitions to reach 10,000 transplants by 2028 — nearly triple today’s figures — this “soft” quarter could be a long-term opportunity for investors.

2. Early profitability despite its “growth stock” status
Even with the company still in hypergrowth mode and spending heavily on 18 jets and a new command center in Texas to round out its logistical network over the last year, TransMedics has delivered profits. Reaching profitability shortly after launching its own logistical network in favor of relying upon third-party fleets, the company is quickly proving the cost-saving proposition that in-house logistics could provide.

Maintaining a rising 8% net profit margin over the last year — and delivering positive cash from operations in three of the previous four quarters, TransMedics is the rare investment that combines high growth and early profits.

While it’s an apples-to-oranges comparison, I’d argue that TransMedics’ profitability potential could be similar to Intuitive Surgical’s over the long term. Though they operate in different realms of the healthcare industry, their business models are vaguely similar as they generate revenue from equipment, accessories, and services, making Intuitive Surgical’s 29% net profit margin a lofty goal for TransMedics to try to attain.

3. A potentially reasonable valuation (over the long term)
Let’s consider two scenarios for TransMedics.

First, let’s imagine the company falls short of its 10,000 annual transplants goal in 2028 and only reaches 8,000 — roughly doubling its current $400 million in revenue through that time. Similarly, rather than reaching anywhere close to Intuitive Surgical’s 29% net profit margin, let’s say TransMedics only gets to 15%, which isn’t unreasonable considering it was already at 12% just two quarters ago.

These figures would leave the company trading at 23 times those future earnings, using today’s market capitalization. Keep in mind that I believe this could prove to be a conservative estimate.

Second, should TransMedics meet its goal of 10,000 transplants in 2028 and reach a 20% net profit margin as its logistical network matures, it would trade at roughly 14 times its 2028 earnings potential. Yes, this includes some significant assumptions, but it nonetheless highlights the possible value that could be hidden in the company’s shares today if it meets its own objectives.

Best yet, this valuation doesn’t account for the fact that TransMedics has only begun entering international markets, which accounts for roughly twice as many transplants as the U.S. Furthermore, management has previously mentioned the potential of expanding into additional organs beyond the three it supports now while also growing the number of indications its OCS can be used for by taking part in new clinical trials.

Ultimately, investors need to avoid overreacting to the last 90 days’ worth of data on TransMedics’ operations. Instead, they should focus on the next two or three decades — and it may be wise to dollar-cost average into this top growth stock at today’s more approachable valuation.

— Josh Kohn-Lindquist

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