Summary Semler Scientific has launched a Bitcoin treasury strategy, purchasing $57 million for its balance sheet this year. The move marks a major pivot compared to the company's medical technology business. The stock price direction is now tied to the direction of Bitcoin, but core operating trends should keep shares volatile. Semler Scientific ( SMLR ) has made headlines by adopting a Bitcoin ( BTC-USD ) treasury strategy, allocating more than $57 million from its balance sheet to the digital asset this year. The open market purchases represent a big bet on the cryptocurrency as a store of value and its potential to generate outsized returns. The move is even more significant considering the medical technology company only commands a current market capitalization of just $242 million, essentially tying its fortunes to the future of Bitcoin. The market reaction since the May announcement has been positive, but also underscores a new layer of uncertainty over the company's long-term outlook. While the core business is profitable and generates positive cash flow, weak growth remains a concern. Ultimately, we're not convinced buying Bitcoin was the company's best use of capital. Here's why we expect the stock to remain volatile. Data by YCharts What Does SMLR Do? Semler Scientific is recognized for its flagship QuantaFlo product, a rapid point-of-care test that measures arterial blood flow in the extremities and represents an alternative to the traditional Ankle-Brachial Index ((ABI)) test. In this case, QuantaFlo has the advantage of being paired with a software interface that can more accurately diagnose cardiovascular diseases, such as atherosclerosis and peripheral arterial disease ((PAD)), including at a pre-clinical stage and with a wider range of patients. Semler believes QuantaFlo is the industry benchmark utilized in diverse healthcare settings across hospitals, private practices, and specialized clinics as key customers. QuantaFlo is currently Semler Scientific's only revenue driver, targeting an estimated +80 million people with cardiovascular risk factors and 550k primary care providers in the United States as its market opportunity. source: company IR Semler Scientific by the Numbers In terms of the latest trends, Semler reported Q1 earnings back in May (for the period ended March 31) with EPS of $0.78, up 24% from $0.63 in the period last year. On the other hand, revenue of $15.9 million represented a decline of 13% from Q1 2023. In this case, the company is citing an ongoing adjustment to the Centers for Medicare and Medicaid Services ((CMS)) coding, which is phasing out the reimbursement for certain PADs without complications. Even as this particular category is a relatively modest part of the overall business, management anticipates ongoing headwinds in what is a three-year regulatory process. The plan is to pursue new FDA-cleared indications for the detection of broader heart dysfunction that can help drive a new round of growth, expected in the second half of the year and into 2025. Profitability and cash flow have been supported by an effort at cost controls and generating internal financial efficiencies. Semler Scientific ended Q1 with $63 million in cash against effectively zero financial debt. Data by YCharts Semler Bitcoin Strategy With that corporate setup since the Q1 earnings report, Semler Scientific made the surprising announcement in late May it had 581 Bitcoins for $40 million in a press release covering the virtues of the cryptocurrency and digital asset. The company cited the SEC's January 2024 decision to approve the trading of Bitcoin-linked exchange-traded products as adding to the legitimacy and institutionalization of the crypto asset class. According to the company's published Bitcoin Treasury Strategy policy , the company intends to adopt Bitcoin as its primary balance sheet reserve, considering it a superior alternative to both fiat currencies and gold. We are in the fortunate position of being a company that has consistently generated cash and has a strong balance sheet with substantial net cash. Our board of directors and senior management have been examining potential uses of cash, including acquisitions and stock repurchases. After studying various alternatives, we decided that investing in bitcoin is currently the best use of our excess cash. Subsequently, Semler Scientific announced a separate $17 million purchase of Bitcoin in May and now holds 828 Bitcoins in total with an implied market value of $55 million at the current price. Overall, Semler joins an otherwise select group of publicly traded companies not directly connected to the crypto industry that have made a commitment to Bitcoin, including MicroStrategy ( MSTR ), Block ( SQ ), and Tesla ( TSLA ), which all hold larger amounts of Bitcoin on their balance sheet. At the same time, Semler's Bitcoin holdings which represent nearly 23% of its entire market value stand out as an outsized position compared to SQ at just 2% of its market cap or Tesla at under 0.0004%, only surpassed by MSTR at closer to 30%. What's Next for SMLR? Naturally, if there is a scenario where the price of Bitcoin will appreciate materially, those gains should be captured by Semler Scientific stock through its measurement at fair value. At the same time, the risk is that the price of Bitcoin could fall, further pressuring shares of SMLR beyond its core financial trends. In contrast to MicroStrategy which has pioneered the process of utilizing convertible debt and equity offerings to leverage into increasingly larger Bitcoin holdings over the last several years, the main difference is SMLR's currently smaller scale and that it has begun its journey with the price of Bitcoin near an all-time high. We do know that Semler launched a mixed-shelf, allowing it to raise $150 million . While noting the intention to use a portion of those proceeds for Bitcoin purchases, it remains to be seen how aggressive the company will be in its strategy going forward. Simply put, Semler's success from these latest efforts will entirely depend on the ability of Bitcoin to keep climbing in price, which is subject to market risk like any other investment. There is also a thought that Semler Scientific is foregoing interest income by not allocating its balance sheet cash to high-yielding money market accounts or even Treasuries. Finally, the market will continue to watch the company's regular operating trends, including how sales of QuantaFlo proceed. Typically, a company with declining sales as is the case this year warrants a valuation discount, but we sense the positive sentiment towards crypto works to at least provide a floor for the stock. SMLR is trading at around 3 times its book value or 18x as a forward P/E ratio is reasonable all things considered. The more difficult question is whether shares of the stock are a better bet compared to buying Bitcoin outright or undervalued relative to other stock market opportunities. We're skeptical on this point. Data by YCharts SMLR Q2 Earnings Outlook Looking ahead to the company's Q2 earnings report set for August 5th, the expectation is for a continuation of the Q1 trends for the core medical technology business, with sales still under pressure. This view is based on comments Semler Chief Financial Officer Renae Cormier made during the Q1 earnings conference call : For the remainder of 2024, we anticipate our revenues could follow a similar cadence that we saw in 2023, with H1 more heavily weighted versus H2. According to consensus, the forecast is for Q2 revenue approximately flat year-over-year, while EPS of $0.53 represents a decline of -25% compared to Q2 2023. Overall, the pivot towards Bitcoin is the bigger story. We'll want to hear from management some indication of how far they intend to take the treasury strategy in terms of quantitative benchmarks for future purchases. Risks to Consider As a small-cap stock, despite underlying profitability, investors should be aware that Semler Scientific remains in a high-risk category based on its concentrated business profile. Any sort of regulatory setback related to new QuantaFlo indications or weaker-than-expected results could open the door for a repricing lower in the stock. In our view, holding a volatile asset such as cryptocurrencies as a balance sheet reserve adds to those risks and doesn't improve the company's long-term potential in the field of medical technologies. Final Thoughts We rate shares of SMLR as a hold, balancing the company's overall solid fundamentals against some skepticism towards the company's new Treasury strategy. It's unlikely the stock is the best vehicle to express a bullish view on Bitcoin while also noting concerns over the core business outlook amid weak sales this year.
