Introduction
As a shareholder who follows the market rather closely, I was quite surprised to see share prices of Augmedix, Inc. (NASDAQ:AUGX) drop Thursday afternoon by 20%+ on news that a 5.5 million offering of common stock was commenced. The company later released details of the upsizing to 6.25 million shares at $4 per share for a total raise of $25 million before fees and other deductions.
Dilution is never ideal but it is part of investing in young companies with cutting-edge products not fully understood yet by many investors. While I did not cover the risk of dilution in my first article, Augmedix: Buy This Under-The-Radar AI Stock, I am not surprised by the equity offering itself as Augmedix needs capital to fuel its growth. In this article, I reiterate my Buy rating to in the wake of a strong Q3 and a promising future for its product in the AI marketplace.
For a company with a market cap of around $230 Million before the announcement, the amount raised by the equity offering is greater than 10% of the company. “Evercore ISI and William Blair are acting as the joint bookrunning managers for the offering. B. Riley Securities is acting as co-manager.” Facing strong ratings from Wall Street, the underwriters were unable to negotiate for a share price significantly below the market price.
The transaction makes sense for a company rapidly developing AI in a competitive, high-interest-rate environment. I maintain that Augmedix sells a highly valuable product with a large potential to change lives and therefore stands to scale wonderfully. It is a long-term investment subject to risks but ultimately I believe this could be a billion-dollar company for patient investors.
Product
AI in general is a fascinating field with emerging use cases. As someone who works with corporate data regularly, I immediately appreciate what it means for software to learn tasks humans ordinarily do, and then do them for us. Products that can integrate data eliminate menial data entry taskwork. Not only is data entry an unpopular role to have within an organization but it is poorly spent time for doctors, who are some of the most valuable forms of human capital in any human economy.
Doctors are worth their medical knowledge and reasoning, not their ability to do data tasks like searching medical records, writing prescriptions, reading medical records, note-taking, ordering labs, and charting. Augmedix has functional and developing technology that eliminates these tasks for doctors, allowing these resources to focus on delivering care to the patient rather than multitasking with administrative duties.
The product depends heavily on speech recognition but also natural language processing technology as it is ultimately generative AI. Augmedix Go, the latest product iteration is a mobile application and platform, that is available on the App Store and is run on a hands-free device programmed with ambient AI to capture clinical language while tuning out background conversation and noise according to this article.
This article points out that one vein of the product rollout, with HCA Healthcare (HCA), has been going well with first reviews coming in positive from an emergency room pilot and the inception of a product expansion designed to assist nurses. Another large partnership exists with McKesson (MCK) who is an equity investor. Details regarding this product rollout are more difficult to highlight, although it is known that the U.S. Oncology Network is an end user of Augmedix.
Financials
In Q3 2023, Augmedix reported revenue growth of 49.63% between the three months ended September 30, of 2022 and 2023 respectively. It has sustained 37.05% CAGR over the last three years, so this past year represents an acceleration in revenue growth, which is a great sign. On the bottom line, Augmedix remains negative, ultimately a use of cash rather than a source of it; dividends are unlikely for some time. Losses are forecasted to shrink over time and investor relations have guided a path to near-term profitability by the mid-2020s. Revenue forecasts suggest sustained growth at its current levels, with revenue to exceed $60 million.
The chart below dives into the costs Augmedix produces. With such excellent revenue growth and decent EV/Sales according to Quant, the costs must come under some scrutiny. With just under $12 million in quarterly revenue and a quarterly loss of around $4.4 million, the three items below comprise the major categories of expenditure. SG&A expenses are quite high, at around 62% of revenue. This suggests that the company is paying high commissions and base salaries to its sales force.
The high revenue growth rate is discounted by the relatively low gross profit margin at around 47% gross profit margin, which is around 16% below what a median healthcare sector company achieves. I interpret the high COGS to labor costs in their documentation specialist supported positions. One key path to profitability is characterized by a phase out of products with margins strained by the cost of documentation specialists. As R&D is essential to realizing the company’s potential to develop a competitive moat, I would rather see a greater mix of expenditure between SG&A and R&D.
I’m looking for a product that will sell itself, and if high SG&A correlates with a high sales expense in this company, then I’m not fully compelled by its product. Another path to profitability involves cutting SG&A, although the sustainability of this cut may undermine growth potential. SG&A has been cut since Q2 2023 all-time highs. Mitigating all these concerns is the fact that expenses have not grown anywhere near as quickly as revenues have grown. The company will become more and more profitable as long as this trend remains, and I see no reason why revenue won’t meet lofty expectations.
Risks
As investors realized upon the new stock offering announcement, there are risks to holding Augmedix. At the product level, there is primarily the risk that Augmedix has built its technology in the Google environment. This third key partnership highlights an important point the price/book with a grade F; Augmedix doesn’t own all the technology that it sells, so it is not yet a vertically integrated company. This presents both an opportunity if the AI migrates from Google and a threat if relationships deteriorate.
There is also competitive risk. A simple web search will yield other companies trying to sell products similar to Augmedix. The extent to which these other operations have integrations with EHR systems or partnerships with large healthcare providers is unknown but doubtful in the opinion of the author. Finally, there is a data security risk. While Augmedix is HIPAA compliant, its ability to maintain sensitive patient data is unproven. Should there be any form of data breach, I would expect share prices to react adversely.
Conclusion
A more optimistic prognosis for Augmedix stock reflects the potential for continued investments from all partners involved. I do not believe the recent equity offering was correctly perceived by the markets. With growth comes dilution. The potential for a player to take this company private is above average in my opinion, as is the likelihood of an acquisition. Companies with the power and size of the three key partners mentioned in this article come with the ability to pour resources into new technologies that will drive their own operational efficiencies.
Now that Augmedix has another $25 million to invest in itself, I hope to see solidification of the product and definition of competitive edge through expenditures in R&D rather than SG&A. Leveraging the company, or diluting investors to finance sales operations, will not be acceptable to me as a shareholder and I am eager to see when and how Augmedix achieves profitability. It may be sooner than expected from what I understand. This piece reflects my honest market outlook on 11/18/2023 and is subject to change, revision, or follow-up to be published exclusively on Seeking Alpha.
