Glaukos Set to Keep Sinking
The first major post-IPO disappointment of 2017 is Glaukos, a manufacturer of medical devices that trades on the New York Stock Exchange as .
This company presents a classic dichotomy of great products with great potential but greatly overvalued shares. The growth achieved by GKOS in recent years has been phenomenal, but its publicly traded record certainly merits caution.
As of April 10, shares of GKOS were trading more than 100 times its expected earnings. While this is a situation that has been observed across Wall Street during the Trump era, it is important to note that the trailing GKOS earnings over the last 12 months come up to a 435 multiple. The problem with this company is that its sales growth of 40 percent over the last few years has not matched earnings. Current sales forecasts estimate sales growth of 25 percent, which are pretty good but not enough to sustain the current GKOS pricing.
Even if Glaukos manages to match sales to earnings, its price/earnings to growth ratio would be higher than 2.5, which means that investors should be very cautious if they hold GKOS, a stock that is too expensive for reasons other than its fundamentals. There is also the issue of market competition as explained below:
The flagship product manufactured by Glaukos is a micro device that offers a stent system to treat glaucoma, an eye condition that affects millions of people around the world. The effectiveness of this stent system explains GKOS strong sales, but competition looms high on the horizon.
A report published by Reuters ahead of the opening bell on April 10 is giving many investors pause as two ophthalmology giants are poised to strike right into the heart of GKOS. Novartis (NYSE: ) and Allergan are planning to release competing stent systems this year; both companies have obtained approval for their biomedical devices while GKOS is still riding the coattails of its IPO.
It is important to note that Novartis will rely on its Alcon unit, which happens to be the global leader in eye care products, to achieve market dominance in terms of glaucoma treatment. It would be easy for Alcon to put pressure on GKOS with lowered pricing because Novartis has plenty of cash and resources to do so.
Our bottom line for shareholders of GKOS: shares could suffer an additional 30 percent plunge in 2017, particularly since this is a stock that is realistically trading at 300 percent of expected earnings.
At the market close on Monday, GKOS was already down over seven percent.
Disclosure: I am/we are short GKOS.
