Seeking Alpha: Novadaq Technologies Growing, But The Market Doesn't Care

Novadaq Technologies (NASDAQ:NVDQ) is a good case in point as to why buying high-multiple med-tech stocks early in their life cycle can be very dangerous. Novadaq has actually been executing well, but concerns about disruptions to sales, a different revenue model, competition, and long-term adoption trends have pounded the stock back down into the single digits - down 30% over the past year and down around 60% from the all-time high.

I don't want to create the impression that Novadaq's success is assured, because it most certainly isn't. Doctors can be shockingly resistant to change, and there is always the risk of a better mousetrap down the line. That said, I think it's pretty interesting that a company that should generate more than $100 million in revenue in 2017 (at a 30% year-over-year growth rate) would be trading below 4.0x that 2017 revenue on an EV/revenue basis (and under 5.0x estimated 2016 rev) when high-growth med-techs routinely get multiples of 6.0x or higher.

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Novadaq Technologies Growing, But The Market Doesn't Care

Seeking Alpha: Novadaq Knocked Back By Looming Competition And A Tough Transition

Small-cap med-tech Novadaq (NASDAQ:NVDQ) has continued to have a rough go of it, with the shares down about a quarter since my last update and down about a third over the past year. Investors are clearly frustrated with the noise and turbulence caused by the company's transition to a direct sales model, as well as spooked by the potential entry of Stryker (NYSE:SYK) this year into a market that Novadaq had had all to itself.

It's tough to advocate patience when a holding is deep in the red, but Novadaq does at least have a good platform technology to market - the company doesn't have to jump through hoops to make the argument that the SPY platform can lead to significantly better patient outcomes, including lower complication rates. What Novadaq does have to do, though, is build out its sales force, place units, train surgeons, and drive the recurrent revenue streams that the company needs to generate high margins. A mid-teens fair value still seems reasonable to me today, but this is likely a company that will be finding its way in 2015 and that isn't often good news for a company's shares.

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Novadaq Knocked Back By Looming Competition And A Tough Transition

Seeking Alpha: Look Past A Sales Transition To Novadaq's Future

Emerging med-tech Novadaq Technologies (NASDAQ:NVDQ) is now entering a new phase of its corporate life. The soured relationship with LifeCell is now in the company's past, and Novadaq is moving forward with a suite of products that offered demonstrated clinical benefits. Transitioning back from LifeCell is going to have a near-term impact on sales, though, and not for the good. Longer-term, I continue to believe that Novadaq can generate more than $1 billion in annual revenue with a portfolio of products that drive better outcomes in open surgery, minimally invasive surgery, and wound care.

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Look Past A Sales Transition To Novadaq's Future

Seeking Alpha: Novadaq Technologies Knocked Back, But A Large Opportunity Remains

In prior pieces on small-cap med-tech Novadaq Technologies (NASDAQ:NVDQ) I've warned investors that emerging med-tech stories don't have smooth, seamless ramps and that this stock's exceptionally high valuation (at least on the short-term outlook) was an invitation to volatility. That has all come home to roost, as the shares that were once 68% above the price where I wrote on them as a Top Idea are now 2% below that level and down about 5% from my more recent piece in May.

I remain a believer in the technology and the market opportunity for Novadaq. There are literally hundreds of thousands of procedures (if not millions) every year where Novadaq's imaging technology makes clinical and economic sense, and with revenue potential of hundreds of dollars per procedure the numbers can get big pretty quickly. Competitive entries seem inevitable (though Intuitive Surgical (NASDAQ:ISRG) has gone unchallenged for a while now) and the company has to navigate an increasingly contentious end to its relationship with LifeCell. Even with those risks, I remain bullish on these shares and believe a fair value in the high teens is reasonable.

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Novadaq Technologies Knocked Back, But A Large Opportunity Remains

Seeking Alpha: Novadaq On A Good Growth Path, But Valuation Makes It Volatile

When a stock trades at more than twice the upper limit of what's considered "normal" for growth stocks in its sector, investors need to be prepared for some significant volatility. It doesn't appear that there's anything really wrong with Novadaq Technologies (NVDQ) other than that this is an emerging med-tech growth story still working to build up its sales capabilities and with a momentum-driven institutional investor base.

That operating expense ran high should surprise nobody who has followed emerging med tech. Placements continue to look strong and while flat recurring SPY revenue was a little disappointing, I believe it is a bump in the road. Valuation is steep here and predicated on major sales and profit acceleration, but this is an interesting speculative med-tech growth story after this pullback.

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Novadaq On A Good Growth Path, But Valuation Makes It Volatile

Seeking Alpha: Novadaq's Story Continues To Come Along

I don't expect the med-tech sector to match the performance of 2013 this year, but I continue to believe that Novadaq (NVDQ) will be a market-beater. Novadaq has only just begun to show what its imaging technology can do in terms of clinical results, market share, and revenue. As time goes on, I expect this company to be one of the most impressive growth stories in med-tech, and a stock well worth owning.

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Novadaq's Story Continues To Come Along

The Motley Fool: Should Johnson & Johnson Be Looking For A Cougar In Devices?

Several years ago, Johnson & Johnson (NYSE: JNJ  ) realized it had a problem with its drug business. This wasn't a particularly poignant revelation, as the struggles of the business from around 2004 to 2010 were pretty easy to see, but the company went and did something about it. Licensing agreements with Bayer and Mitsubishi Tanabe brought in drugs like Xarelto and Invokana, while the billion-dollar acquisition of Cougar Biotechnology ultimately turned into the blockbuster prostate cancer drug Zytiga.

I mention this because other parts of J&J could use some TLC. Not only is the consumer/over-the-counter business still on a slow path to recovery from repeated product quality and recall issues, but the device business has turned into a perpetual disappointment with low organic sales growth. While the large acquisition of Synthes (announced in 2011, completed in 2012) has spiffed up the orthopedics business, I think it's worth asking whether Johnson & Johnson should think about going Cougar-hunting in the device space.

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Seeking Alpha: Novadaq On Track To Bring Excellent Growth To Light

With second quarter results in hand, Novadaq (NVDQ) continues to look like a rare med-tech story with both very strong growth and large addressable markets trading at something close to a reasonable valuation. "Reasonable" is a subjective assessment, of course, it will take many years of exceptional growth for Novadaq to earn its valuation, but I believe the company's strong portfolio of surgical imaging technologies can drive that growth.

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Novadaq On Track To Bring Excellent Growth To Light

Investopedia: Intuitive Surgical Burning Up On Re-Entry

Surgical robotics leader Intuitive Surgical (Nasdaq:ISRG) consistently posted exceptionally strong growth for a long period of time, gaining an out-of-this world valuation from the Street in the process. Now investors having to re-learn a familiar med-tech lesson all over again – if something looks to good to continue, it probably won't. Although I'm still bullish on the underlying thesis that Intuitive Surgical will continue to see growing adoption and procedure counts, investors are seeing a harsh reassessment of the company's growth prospects and the “fair” price to pay for those prospects. I believe that Intuitive Surgical shares are too cheap at these levels, but investors considering the stock ought to remember that the bias of the Street will likely be against the shares for a couple of quarters.

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Seeking Alpha: Red-Hot Novadaq Shows There's Green In Being Green

There aren't a lot of great med-tech growth stories these days, and many of those are already quite expensive. Novadaq Technologies (NVDQ) is hardly cheap at almost 22 times sales, but this company is very early in its product launch life and could see revenue grow from about $25 million over the trailing 12 months to perhaps $1 billion down the road.

With an affordable, safe, easy-to-use diagnostic system that delivers very real benefits in terms of lower complication rates and costs, Novadaq has an impressive opportunity as well as strong partners like LifeCell and Intuitive Surgical (ISRG) to help them realize those opportunities. I think it's relatively easy to argue that Novadaq is worth about $18 per share today, and seeing upside beyond $21 is not too challenging.

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Red-Hot Novadaq Shows There's Green In Being Green