Is It Too Early to Invest In Nano-X Imaging?

Investing in up-and-coming businesses can result in potentially life-altering returns for investors. Nano-X Imaging (NNOX -2.19%) is a small-cap stock with a valuation of around $1 billion. Many investors are bullish about it and believe it may be the next big growth stock in healthcare. This year, its shares have jumped by 140%, making it one of the hottest stocks to own in 2023. 

But given the uncertain road ahead for the business and profitability nowhere in sight, is it too early to be jumping on this bandwagon?

Why investors have been bullish

There have been a couple of developments that have gotten investors excited about Nano-X of late. One is that healthcare behemoth Johnson & Johnson disclosed that it increased its investment in the X-ray company by nearly 62%. That’s a big increase, but the investment is still worth less than $6 million today. That’s a relatively small chunk for a business that last year reported profits of just under $18 billion

Another exciting piece of news for Nano-X investors came out in early May, when they learned that the U.S. Food and Drug Administration (FDA) provided 510(k) clearance for its multi-source Nanox.ARC X-ray system. The 510(k) clearance means the device is safe and effective, and that can now pave the way for the company to market the device. It also obtained clearance for the related cloud-based infrastructure, the Nanox.CLOUD.

The company says it will work with the FDA to obtain more regulatory clearances. The agency has cleared the device to be used in many areas, including hospitals, clinics, and imaging centers. Nano-X plans to offer it under what it says is “an innovative pay-per-scan business model.”

A pay-per-use model could be risky

It has been a long road for Nano-X to get where it is right now. The company first filed its 510(k) application for the Nanox.ARC system in 2021. And with the company focusing on a pay-per-use system and on making X-ray imaging affordable to patients, this means that even in the long run, Nanox may not exactly be a money-making machine.

A pay-per-use model can be a risky one, especially if companies have no financial incentive to use the devices (no large sunk costs or big investments to justify the use). For investors, that means the path to profitability and sustainability for the business may be a long one. 

There could be many stock offerings to come

The risk for dilution is high, given that Nano-X only received clearance for its X-ray system and isn’t mass-producing it just yet. Costs will inevitably be much higher. Last quarter, for the period ended March 31, the company’s operating loss totaled $12.1 million, and it used up $10.7 million in cash to fund its day-to-day operating activities.

Nano-X has approximately $78 million in cash and marketable securities on its books, so it can manage that level of cash burn, potentially for years. But as the business inevitably spends more money on investing activities, such as building its devices and scaling up operations, its expenses are sure to spike.

And without a big source of revenue to rely on — last quarter, Nano-X generated $2.4 million in revenue from teleradiology services — its cash burn could worsen. That may lead to the business turning to stock offerings and debt to help grow its operations.

Nano-X is too risky a stock to buy today

There’s been plenty of hype around Nano-X stock this year, but the fundamentals simply aren’t there yet to suggest that the business will be in good shape in a few years. It has taken a while for the company just to get to this point, obtaining clearance for its multi-source X-ray system. The hard part will be producing the devices at scale, getting them to customers, and then having them use them. How that will play out and how strong demand will be is a big question mark moving forward.

Assuming that, because Johnson & Johnson invested in the business, it is a safe one to own is also a risky proposition. The healthcare giant has deep pockets, and it’s a low-risk move for the company that potentially has lots of upside. It can afford to make such an investment — retail investors who don’t have billions at their disposal can’t.

Nano-X remains a speculative buy and is only suitable for investors who feel comfortable taking on significant risk and the possibility of significant losses. Nano-X has a lot of work ahead to prove that it can be a good investment, and the safest thing to do right now is to steer clear of the stock until it can at least demonstrate strong demand for its devices.