It has been a volatile few weeks for tech shares. A lot of the pain has centred on stock exchanges in the US, but some UK stocks have suffered too. One UK medtech share I own is now 60% lower than it was a year ago.
Is this a sign I should cut my losses – or a buying opportunity for my portfolio?
Medtech pioneer
The share in question is Renalytix (LSE: RENX). The company is not very well-known. That is partly because of its short history. It’s also because it focuses on the US medical sector, despite its London listing. Its flagship product is a kidney diagnostics platform. The company thinks it is a cost-effective way for doctors and medical care providers to diagnose certain kidney conditions.
That could potentially be a big market. Renalytix has proprietary technology and growing clinical support. It has made inroads into selling its services to medical providers. To date though, it remains in the early stages of commercialisation. In the first quarter, for example, revenue was just $0.5m. While that is better than the zero figure it recorded in the same quarter of the prior year, it is still a small amount. Even after the share price fall, Renalytix commands a market capitalisation of £286m.
Tumbling share price
The Renalytix share price was doing well until the end of July. Since then, it has steadily slid downwards. It has given up 37% since the start of this year, but the decline had already set in months before that.
After an initial flurry of excitement in the early months of Renalytix’s listing, I think increased investor focus on short-term business results has hurt the share price. Clearly the company’s product has potential. But it will take time and money to try and realise that potential. This has become clearer as Renalytix has ramped up its sales efforts by recruiting more staff. General and administrative costs in the quarter almost doubled on the year. The company identified increased headcount as a key driver for that increase.
Over time, if the sales effort pays off by generating substantial new revenue, I think it could trigger investors to start focusing once more on the long-term potential for Renalytix. But at the moment, a lot of shareholder attention is on the cost and speed of the sales push. If that continues to be the case, I think the share price could keep sliding from here.
I would still buy this UK medtech share
Despite that, I currently have no plans to sell my Renalytix shares. Indeed, I would consider using the current price weakness to increase my position.
The market size for kidney diagnostics is huge — and growing. Renalytix has an excellent product that could help it get a good share of the market. The more it sells, the greater the benefits of scale should be for it. So, if it can build revenue strongly enough, that could turn out to be very good news for profitability.
For now it remains to be seen if that will happen. The attractive economics of this business area could lead to more competition, hurting its long-term profitability. But despite that risk, I continue to see the company as an appealing UK medtech share for my portfolio.
Christopher Ruane owns shares in Renalytix. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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