San Jose, California-based Eargo, Inc. (EAR - Get Rating) is a medical device company that markets and sells hearing aids in the United States. Its hearing aids are virtually invisible, rechargeable, and completely-in-the-canal devices indicated to compensate for mild to moderate hearing loss. The company sells its products direct-to-consumer and through omnichannel.

On August 16, 2022, the Food and Drug Administration (FDA) published a final rule that establishes a new category for over-the-counter (OTC) hearing aids, allowing consumers with perceived mild to moderate hearing impairment to purchase hearing aids directly from stores or online without the requirement of a medical exam, prescription or a fitting adjustment by an audiologist.

EAR supports over-the-counter hearing aid final ruling. Christian Gormsen, President and CEO, said, “This ruling aligns with Eargo’s mission. By making hearing aids more accessible and affordable while maintaining safety standards, the industry will now finally be driven by consumer demand for superior products.”

“We also believe the FDA’s removal of certain selling restrictions for OTC hearing aids will allow Eargo to expand the way we serve customers by adding full retail and physical locations in a simplified and scalable way. We will need to expend time and resources evaluating the final rule and ensuring that our devices and processes come into compliance with the new requirements,” he added.

Following the FDA clearance of the over-the-counter hearing aid sales, EAR skyrocketed. The stock has gained 198.7% over the past month to close the last trading session at $2.30.

However, before the FDA ruling, the stock had sharply declined since EAR faced False Claims Act allegations last year, which concluded on April 29, 2022, as the company agreed to pay $34.37 million to settle allegations for unsupported diagnosis codes. The stock has plunged 55.8% year-to-date and 89.4% over the past year. It is currently trading 90.1% below its 52-week high of $23.14, which it hit on September 9, 2021.

Furthermore, the company reported disappointing second-quarter results. EAR’s net revenue fell 68.6% year-over-year. The decline in revenue was mainly because of a decrease in gross systems shipped, a reduction in average selling price, and an increase in sales return rate, as the company operated on a cash-pay basis only during the three months ended June 30, 2022. Also, the company incurred huge losses during the period.

Here is what I think could influence EAR’s performance in the upcoming months:

Poor Financials

For the fiscal 2022 second quarter ended June 30, 2022, EAR’s net revenue decreased 68.6% year-over-year to $7.20 million, while its non-GAAP gross profit came in at $2.55 million, down 84.6% year-over-year. Its non-GAAP general and administrative expenses increased 153.5% from the year-ago value to $15.98 million.

EAR’s non-GAAP operating loss amounted to $29.93 million, widening 116.6% year-over-year. In addition, the company’s non-GAAP net loss and loss per share attributable to common stockholders came in at $30.93 million and $0.78, worsening 119.7% and 116.7% year-over-year, respectively.

Weak Growth Prospects

Analysts expect the company’s revenue to decline 70.3% from the prior-year period to $7.05 million in the fiscal 2022 second quarter (ending September 2022). Also, the consensus loss per share estimate for the ongoing quarter is expected to come at $0.56. The company has missed the consensus revenue estimates in each of the trailing four quarters, which is disappointing.

Furthermore, Street expects EAR’s loss per share to come in at $2.44 for the fiscal year 2022 (ending December 2022). Also, analysts expect the company’s revenue of $30.46 million for the current year to worsen by 5.2% year-over-year.

Low Profitability

EAR’s trailing-12-month ROCE, ROTC, and ROTA of negative 200.80%, 74.97%, and 125.25% compare with the industry averages of negative 38.46%, 21.27%, and 29.64%, respectively. In terms of the trailing-12-month Asset Turnover Ratio, the stock’s 0.02% is 94.3% lower than the 0.34% industry average.

Frothy Valuation

In terms of trailing-12-month EV/Sales, EAR’s 26.06x is 503.3% higher than the 4.31x industry average. Its 25.88x trailing-12-month Price/Sales is 444.9% higher than the 4.75x industry average. Likewise, the stock’s 8.34x trailing-12-month Price/Book is 255.7% higher than the 2.34x industry average.

POWR Ratings Reflect Bleak Prospects

EAR’s overall F rating translates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

EAR has a grade of F for Stability. The stock’s relatively high beta of 2.52 justifies the Stability grade. In addition, it has an F grade for Sentiment, consistent with its weak revenue and earnings growth estimates.

EAR is ranked #137 out of 145 stocks in the D-rated Medical-Devices & Equipment industry.

Beyond what I have stated above, we have also given EAR grades for Value, Growth, Quality, and Momentum. Get all EAR ratings here.

Bottom Line

EAR delivered deteriorating financials in its last quarter. Moreover, analysts expect the company’s revenue to decline by 70.3% for the current quarter and 5.2% for the current year. Although EAR has more than tripled in price since the FDA ruling, the stock is still trading 90.1% below its 52-week high.

Given its weak financials, bleak growth prospects, higher-than-industry valuation, low stability, and low profitability, we think it could be wise to avoid the stock now.

How Does Eargo, Inc. (EAR) Stack Up Against its Peers?

EAR has an overall POWR Rating of F. One could also check out these other stocks within the Medical-Devices & Equipment industry with an A (Strong Buy) rating: Fonar Corporation (FONR - Get Rating), Electromed, Inc. (ELMD - Get Rating), and Utah Medical Products, Inc. (UTMD - Get Rating).

EAR shares were trading at $1.89 per share on Friday afternoon, down $0.41 (-17.83%). Year-to-date, EAR has declined -62.94%, versus a -13.00% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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