AtriCure (NASDAQ:ATRI) is a company not well-covered on this platform. Early 2017, I last reviewed the investment outlook for the shares as I concluded that management would need to find a cure for continued losses. Steady revenue growth and expectations of investors that the business would become profitable have been driving shares higher between 2017 and now, allowing management to continuously issue some shares at reasonable levels to raise necessary cash.

Here and now, the bottom-line results are still not impressive, although steady and continued revenue growth is compelling to shareholders, with valuations being perhaps fair, given the valuations in the wider industry, of course, based on sales multiples as the company continues to lose money.

Let’s Go Back

Founded in 2000, AtriCure is a developer of innovative surgical devices creating precision lesions in cardiac and soft tissues. The company has developed a product called the Isolator, a bipolar ablation clamp, an alternative to create lesions which block electrical impulses which create atrial fibrillation.

The Isolator was commercialized in 2003 and approved for open-body surgical and minimally invasive procedures. The usage to prevent atrial fibrillation only came many more years after surgeons have used it on an off-label basis before. AF is quite prevalent with 33 million people affected, half in the US. The irregular heartbeat increases the risk of a stroke, with the Isolator being a cost-effective system to improve outcomes for patients.

The company went public at $12 in 2005 as operating asset valuations came in just around $100 million, making it a small-cap at the time. The company reported revenues of $38 million that year, on which it reported an operating loss of $15 million. Shares fell to just $1 in 2009 even as sales advanced to $55 million as investors feared the losses being reported.

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The company recovered and developed a cryoablation system with a launch seen in 2009, designed to exclude the left atrial appendage, creating revenue diversification within the product line-up as the company furthermore embarked on some cost cuts. By 2014, the company surpassed the $100 million revenue mark, and while shares recovered to $20 at the time, investors since the first hour have hardly benefited from the big increase in sales due to continued losses and continued dilution over time.

Early 2017, the situation was as follows: the company just reported 20% revenue growth for 2016 with sales coming in at $155 million, in part driven by a wider assortment. The problem is that, despite the rapid increase in the revenue base, the company continued to bleed money with a net loss of $33 million reported that year and EBITDA loss of $9 million.

With 32 million shares trading at $16, equity was valued at around half a billion (even including a modest net cash position). While a 3 times sales multiple optically looks low, given the industry in which the company operates, knowing sales grew 20% at the time, continued losses provided few triggers to send shares higher, as investors had already incurred a decade of continued dilution. With few triggers seen, I concluded to be quite cautious on the shares, but that has been a bit wrong.

What Happened?

Since early 2017, AtriCure has seen continued sales growth with some encouraging developments. Revenues rose 13% in 2017 to $175 million as operating losses narrowed slightly from $31 million to $25 million. The company guided for sales to rise to $190-$196 million with positive EBITDA seen in 2018, suggesting at least further improvements on the bottom line. With shares rising as a result of modest improvements, the company actually issued some shares at $30 during 2018 to offset by the continued losses.

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For 2018, sales did come in at $202 million as revenue growth accelerated to 15% as operating losses narrowed further to $17 million. Given the dilution and increase in the share price towards the $30 mark, equity was now valued around a billion, equivalent to about 5 times sales.

Shares started 2020 actually at $30, yet strong momentum pushed shares up to $45 by February. Revenues for the year rose 15% to $231 million, ahead of the initial guidance as operating losses jumped to $33 million, which is quite disappointing by all means, certainly as adjusted EBITDA losses came in around $7 million, in stark contrast to a small profit guided on that metric. So, while revenue growth continues and the company continues to invest heavily into R&D (to the tune of $41 million a year), shares continue to gain ground, and while some promising research results were announced, I have the feeling that expectations are running a bit high.

Shares fell back to $25 during COVID-19, only to recover to a high of $50, to now trade around the $40 mark, even after two very soft quarters (for obvious reasons). Taking advantage of this, management issued quite a few shares again in May at $44 per share to reinforce the financial position at an opportunistic point in time.

Here and now, a near-42 million share count represents an equity value near $1.7 billion, or about $1.5 billion if we adjust for a net cash position of around $200 million since the latest offering. In normal conditions, the business should be able to generate a quarter of a billion in sales this year, and while still not profitable, even so long after the public offering, the 6 times multiple seems perhaps justifiable in relation to the multiples at which medtech companies are trading as the growth is a big plus, offset by the disappointing margins, or better said losses.

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A Final Thought

After a few volatile months, shares of AtriCure have done really well this year despite the fact that the business is impacted by COVID-19, at least in the short run. The issue at hand is that, while the long-term secular growth story remains in place, the implied sales multiple has doubled from 3 to 6 times, while losses are not really addressed.

On the positive side, the company currently has sufficient cash to offset the cash burn, yet here and now, I see few reasons to chase the shares here, although a low interest rate environment makes a predictable double-digit revenue growth look compelling.

Here and now, I think that shares are more or less fairly valued, given the circumstances, not being in a rush to initiate any position whatsoever here.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.