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Accuray Just What the Doctor Ordered?


Even if Accuray never achieves the monstrous success of Intuitive Surgical it still can be a leading niche player with strong growth fundamentals.


First thing's first. Simply put, Accuray's (ARAY) main product is an innovative robotic surgery system for cancer tumor treatments. You can find more information about the company at its own site here, product page here or at the finance site here.

My quick take is that the product seems to be doing very well and has gained a solid market acceptance. The total addressable market is huge, there are many new potential surgical applications for ARAY and competition is fragmented at best. So what's the rub?

ARAY is a somewhat recent IPO, trading for a little over seven months. The stock had been trading pretty firm, until its most recent quarterly earnings report, that is.

Here's the rundown; revenue's up to $44 mln from $21.4 mln (yeah, that's 100% growth), non-GAAP EPS was five cents, which was three cents better than consensus as well as strong growth in order backlog, high margin serviced based revenues and market acceptance.

The bad was possibly guidance, which came in quite solid at $250-270 mln. This was $6 mln below consensus but it's also a full year out and we have a limited number of analysts covering this young public company.

There was an ugly reaction to this most recent quarter – the stock was down a quick five points off of the $18 closing price before the earnings release. Much of this damage seemed to occur based on a couple of negative analyst notes focusing on "disappointing" margins and somewhat softer guidance. On both points I disagree as margins were still 56.6% in the fourth quarter and that revenue guide was fine as it's still a full year out and could prove conservative. Also, in listening to the call I think the company can clean up how it handles analysts' questions. The theme of "less is more" comes to mind, and "let the analysts do their work." I think ARAY could and will improve in this area over the coming quarters.

So was this huge sell-off justified? Is this a broken IPO? Is there long side money to be made on this stock from these levels?

Let's get to all those issues.

First, ARAY possibly looked to be discounting a poor quarter, coming into this report, as the stock has pulled back over 40% from highs ahead of the quarter. Obviously, a lot more selling hit the stock and here's the first piece of silver lining. To me it looked like a big seller (or a few of them) was targeting ARAY due to an upcoming IPO lockup expiry. Also, the sell side volume was huge and this now looks like it could be a classic selling climax. If the bulk of the selling was based on end of lock-up expiry then that would indicate little to no fundamental connection.

At this point the post quarter weakness does look to have little fundamental connection. The stock has since recovered (though it's still selling well 50% plus off highs).

Is this a broken IPO? I would say this is an undervalued IPO, not a broken one. The company has initiated a stock buyback plan and the Jeffries analyst issued a strong note outlining ARAY's strong competitive position. ARAY has an analyst day coming on the 4th and that could also highlight other positive aspects to the company as well as continuing strength in its business trends.

Bottom line, I do not think the IPO is broken and view ARAY as a compelling long side story for patient investors looking for a speculative medical device story. While it may be too soon to call ARAY the next Intuitive Surgical (ISRG), it could be the closest candidate from the current crop of newcomers in the field of robotic surgery. Additionally, even if ARAY never achieves the monstrous success of ISRG it still can be a leading niche player with strong growth fundamentals, which propel the shares higher over time.

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Position in ARAY.

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