Butterfly Network, Inc. (Ticker: BFLY) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
If you haven’t already, subscribe to our newsletter here to get our articles directly to your inbox and follow us on Twitter and Instagram! Also join us for our Twitter spaces, every Monday we discuss our stock breakdown at 8 PM EST, & Friday we have a Bitcoin Happy Hour at 4:30 PM EST!
Company Description
Butterfly Network Inc. is a digital health company that develops, manufactures and commercializes ultrasound imaging solutions globally. Butterfly offers Butterfly iQ, which is a handheld and single-probe ultrasound system of the whole body and Butterfly iQ+ which is a point-of-care ultrasound imaging device that connects with a smartphone or tablet. Butterfly services healthcare practitioners and others in the medical and veterinary field.
Quantitative Analysis
At the time of this writing (11/20/2021), BFLY is trading at $8.00 with a 52 week range of $6.75 - $29.13 and a market cap of $1.58B. In Q3 of 2021, total net revenue increased 44% year-over-year (YoY) to $14.6 million. Non-GAAP adjusted gross profit and adjusted gross margins went from -26.3% to 49.3% and gross profit went from -$5.1 million to -$69.3 million. Return of equity (ROE: Net Income / Total Equity *100) of BFLY is -29.68% and net margin (net income / revenue) is -92.59%. The debt to equities ratio (total liabilities / total equity) is 0.29. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view BFLY’s last quarterly earnings report here. Below we have percent returns since IPO denominated in both USD and Bitcoin. We have decided to include the stock price in Bitcoin to show how the stock is performing relative to the best current inflation hedge to further analyze equity performance during extraordinary inflationary times.
Qualitative Analysis
Butterfly’s profit relies on initial sales and sustained use of products in order to maintain subscription revenue. Butterfly has not reported a positive earnings report for any quarter since going public (February 2020), but has created potentially ground-breaking disruptive ultrasonography technology at an inexpensive price. Due to the usual regulatory nature of the medical field, the acceptance of new technology may be a slow process to integrate into everyday use. Also, training medical professionals on new technology may take some time, as well as selling medical professionals new technology. The low cost and portability of BFLY’s products are key selling points for hospitals globally, especially those without ultrasound technology readily available. According to Butterfly, more than 4.7 billion people around the world lack access to medical imaging. In line with that, the company just signed a partnership with Abdul Latif Jameel Health to bring Butterfly's iQ+ device to the Middle East, North Africa, Turkey, and India. Another unique aspect of BFLY is their subscription-based business model. The subscription model is becoming more popular in all industries but through our research, we have not found another company trying to pair a medical service such as an ultrasound within a subscription-based model. If Butterfly is successful, it will be interesting to see if others follow in their footsteps.
Bullish Thesis
Here are three points to support the bullish thesis:
Subscription Based Model: I am personally a big fan of the subscription model as it will provide reliable and consistent income every month and thus every quarter. Butterfly is unique in the fact that the subscription is needed in order to make use of the equipment, which is a similar model to Peloton model with their equipment except Butterfly’s equipment will not work without the use of the phone application which requires a subscription. Initially, Butterfly will need to sell its products in order to generate an initial profit, but that profit will continue to grow as more units are in circulation growing the required subscribers. Also the subscription of their app will require lower overhead costs and will allow Butterfly to use its profits for other things like research and development of new products or anything it would like.
Low Cost of Equipment: The cost of an ultrasound machine ranges anywhere from $20,000 to $75,000 and Butterfly is selling its Butterfly iQ+ product for $2,999 with the addition of the subscription. This price point will allow smaller countries and smaller entities to have access to ultrasound machines where the price point generally would not allow them to own machines or only own one or two machines whereas with this price point these entities can own as many machines as needed. This low barrier to entry has allowed Butterfly to sign a partnership with Abdul Latif Jameel Health to bring Butterfly's iQ+ device to the Middle East, North Africa, Turkey, and India. It will be interesting to see how this works out in these countries as Butterfly is bringing equipment to places which generally do not have access to vast amounts of medical equipment.
Transportability of Products: Classic ultrasound machines generally have to be wheeled in and require a large computer in order to operate, but the Butterfly iQ+ now can seemingly be brought anywhere. This allows ultrasound machines to not only be used in facilities that might not be set up ideally for the old ultrasound machines, but also allows for use out in the field. This could bring new applications, such as various military applications that may have not been discovered just yet. This will allow users to find new ways to implement ultrasounds into new scenarios and improve healthcare globally.
Bearish Thesis
Here are three points to support the bearish thesis:
Regulatory nature of the medical landscape: The regulatory environment in the medical field is notoriously difficult to navigate. Getting new medical devices approved for clinical use can be costly and time consuming, often requiring years of research to prove efficacy, reliability, and validity. In fact, in the U.S., bringing a new medical device to market takes between 3 and 7 years. And even after the device has been approved for use, marketing, sales, and training pipelines must be ready to roll to get the devices into clinics and ready to use. Because BFLY is a global provider of devices, the number of government agencies and regulators they’ll have to comply with further complicates their path to success. A young company that struggles to generate revenue and has large capital requirements for R&D and marketing might be a dangerous investment and should give investors pause.
Semiconductor shortage: While BFLY’s devices have several unique features (including affordability and transportability, as mentioned above), they, like nearly all other electronic devices coming to market today, require semiconductor chips to operate. According to the company’s last quarterly report, BFLY has chosen the Taiwan Semiconductor Manufacturing Company (TSMC) as their sole supplier of semiconductor chips. The major semiconductor manufacturers (including TSMC) are currently experiencing supply chain issues and have been slow to produce and deliver new chips. On top of the current chip shortage, geopolitical friction between Taiwan and China could cause serious issues for BFLY’s chip supply, leaving them unable to produce new devices.
Capital requirements and lack of revenue: As mentioned throughout the rest of this article, Butterfly has been unable to generate sufficient revenue from device sales. With the high cost of R&D and marketing, and the time it could take to bring new devices to market, one has to wonder how long Butterfly can continue to post losses before investors become impatient. Investors should keep an eye on BFLY’s ability to generate revenue, particularly in global regions where the cost of bringing devices to market is lower (e.g., because of less strict regulatory requirements).
Learn more about BFLY here. Stay up to date on Green Candle by subscribing to our newsletter and following us on Twitter and Instagram! And don’t forget to join us in our Twitter Spaces tonight at 8 PM EST!
If you’re new to stock investing, check out our introduction to stock investing series:
Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.