Down 52%, Is TransMedics Stock a Buy on the Dip?

From the beginning of 2024 through Aug. 23, shares of TransMedics (TMDX 0.56%) stock soared by 123% -- but the good times didn't last. A third-quarter earnings miss sent shares of the organ-transplant equipment and service provider reeling. By lunchtime on Nov. 7, the stock was 51.5% below its previous peak. Hospitals and organ transplant centers increasingly rely on TransMedics' proprietary organ care system (OCS). Is the latest stock-market beatdown an opportunity to buy a quality growth stock at a steep discount? Here's a closer look at why shares tanked, and at the company's path forward, to see whether it's a smart buy now. Why TransMedics stock tanked On Oct. 28, TransMedics reported third-quarter revenue that shot 64% higher year over year to $108.8 million. This hardly seems like a reason to complain, but it was $6.2 million below consensus estimates and $5.5 million less than the company reported in the second quarter. The bottom line disappointed investors even further. Wall Street was expecting earnings to reach $0.29 per share. Earnings that reached just $0.12 per share were so far below expectations that hardly anybody listened when management tried to soothe investors by reiterating previous guidance. TransMedics' revenue and profits started soaring in late 2021, after the U.S. Food and Drug Administration (FDA) approved its OCS to maintain and transport hearts donated after brain death (DBD). Expectations of continued growth at its previous pace drove the stock price up to a nosebleed-inducing valuation. TMDX Revenue (Quarterly) data by YCharts. This stock isn't falling because Wall Street thinks its business is in trouble. It's down because analysts now expect sales and earnings growth to be a little less thrilling than previously expected. Why Wall Street is still bullish Many analysts who follow TransMedics reduced their price targets, but Wall Street isn't turning its back on the stock. Oppenheimer lowered its price target to $125, which still implies a gain of around 45% from recent prices. TransMedics is the only company with a warm-perfusion OCS approved by the FDA to pump hearts, lungs, and livers full of warm blood so they can be transported longer distances than previously possible. The company's proprietary OCS also greatly expanded the potential pool of donor hearts. The FDA approved the TransMedics OCS for use with hearts donated after circulatory death (DCD) in April 2022. Previously, DCD hearts were almost always discarded. Now we know that quickly placing them in an OCS makes them just as valuable as DBD hearts maintained the old-fashioned way. In the OCS DCD heart trial, patients who received a DCD heart maintained with a TransMedics OCS were significantly more likely to survive without complications than patients who received a DBD heart stored on ice. The TransMedics OCS makes it possible to transport organs longer distances, which greatly increases the likelihood of finding a matched recipient. In 2023, the company acquired a fleet of jets so it no longer has to rely on charter flights from third parties. Over the long run, operating its own aviation service will lower delivery expenses. As the only company with an FDA-approved OCS and a fleet of jets, TransMedics doesn't necessarily need to pass those savings to its clients. TransMedics invested in a new aviation maintenance hub in Dallas during the third quarter. Earnings that fell back in the third quarter could soar in 2025, because many of its planned aviation-related investments have already been paid for. According to CEO Waleed Hassanein, the sequential revenue decline seen in the third quarter was due to normal variability. From the second quarter to the third quarter this year, nationwide liver and heart transplant volumes were 5% lower. A buy now? TransMedics stock is down by about half from its previous peak, but it isn't cheap. On Thursday, Nov. 7, it was trading for 89 times earnings expectations. TransMedics is still richly valued, but it could grow fast enough to justify its nosebleed-inducing earnings multiple. Citing seasonality for its third-quarter miss, management still expects total revenue to climb by 76% to 84% this year. In 2025, TransMedics will present more clinical evidence regarding its OCS. Odds are strong that with improved outcomes as compared to traditional organ storage, the company will become even more popular among the nation's transplant centers. A rich valuation makes this stock somewhat risky. If you have a high risk tolerance, adding some TransMedics shares to a diversified portfolio at their beaten-down price could be a smart move.