Eargo Inc (NASDAQ: EAR) shares have soared by more than 120% on Wednesday morning, with the hearing aid specialist’s stock price climbing above $1.50 for the first time in almost two months.
Today’s bump in share price only tells a small part of the company’s rollercoaster story though. Read on to find out if EAR stock is the right investment for you!
What is Eargo?
Eargo is a medical device company dedicated to improving the quality of life of people with hearing loss. The company says its product and go-to-market approach address the major challenges of traditional hearing aid adoption, including social stigma, accessibility and cost.
It claims that its hearing aids are the first and only virtually invisible, rechargeable, completely-in-canal, FDA regulated, Class I exempt device for the treatment of hearing loss.
The company was formerly known as Aria Innovations and changed its name to Eargo in November 2014. Eargo was founded in 2010 and is headquartered in San Jose, California.
How Does Eargo Make Money?
Consumers can purchase the company’s hearing aids online or over the phone and get personalized consultation and support from licensed hearing professionals via phone, text, email or video chat.
The company says that its solution is offered to consumers at approximately half the cost of competing hearing aids purchased through traditional channels in the United States.
EAR Stock Financials
Despite Wednesday’s sharp rise in share price, EAR stock has dropped in price by nearly 70% across the year to date at the time of writing.
The company’s most recent earnings update, which covered the three-month period ended 31 March 2022, showed Eargo had achieved:
Revenue of $9.2m, compared with $22.0m in the same period 12 months prior.
Gross profit of $3.7m, down from $15.8m.
Total operating expenses of $34.1m, up from $29.1m.
Net loss of $30.6m, a wider loss than the $13.6m achieved in the comparable period.
Net loss per share of $0.78, compared with a loss of $0.36 in the same period in 2022.
DOJ Investigation
The primary reason proffered for the company’s poor performance in its most recent results was primarily due to an investigation by the US Department of Justice which has now been resolved.
Eargo was alleged to have billed the Federal Employees Health Benefits Program (FEHBP), which is the largest employer-sponsored group health insurance program in the world, for hearing aids which patients may not have needed. The company is alleged to have done this by providing unsupported hearing loss diagnosis codes.
In April the company agreed to pay $34.4m in order to resolve the allegations. The company said the investigation had resulted in lower shipments and higher cash burn, as well as increased expenses and several operational changes.
EAR Growth Potential
The company estimates that more than 45 million Americans suffer from some form of hearing loss, but notes that less than a quarter have used a hearing aid. The business sees this statistic as resulting from a combination of stigma, discomfort, high cost, inconvenience, cumbersome experience and a lack of access.
The company estimates that its addressable market in the US is worth more than $30bn. It claims to have an advantage at addressing this market due to the small and discrete size of its product, the remote clinical support offered, the in canal and non-occluding nature of the product, and a lower price than traditional hearing aid manufacturers.
While the business had previously focused on the insurance channel, since the DOJ investigation it is turning towards cash paying and repeat customers. Repeat shipments are taking up an increasing proportion of the company’s business, but still only constituted around 20% of shipments according to the latest figures.
Additionally, the business anticipates that purchase of certain hearing aids in physical locations without involvement of a licensed hearing professional should be simplified depending on action from the US Food and Drug Administration. The US Senate passed legislation in 2017 to ease over the counter sales of hearing aids, but this has not yet been implemented by the regulator.
Eargo says there is substantial potential for the retail space to account for a significant proportion of the market once the FDA gives the green light.
EAR Investment Risks
Investing in a business which appears to have engaged in unsavoury business practices is inherently risky. The company has significantly damaged its cash position and its reputation over the last 12 months and will have to work hard to win back the trust of customers.
In a company update published following the resolution of the DOJ investigation in April, the business said its top priority was to regain insurance coverage of Eargo for government employees under the FEHB program. However, it is possible that the company will find this a challenging task given its recent indiscretions.
Money is also a concern for the business. Eargo’s most recent quarterly update showed that revenue had more than halved, while expenses had increased.
However, the business recently confirmed an additional $100m in funding from Patient Square Capital for senior secured convertible notes. This should give the company sufficient working capital for the foreseeable future, but it remains under pressure to improve revenues.
Finally, it is also worth noting that Eargo has recently struggled with compliance with NASDAQ listing rules due to failure to file its annual report for the year ended 31 December 2021 by the required date.
On 31 May the company announced that its delinquency had been cured and that its stock could continue to be listed on the index, but the matter should still be cause for concern among potential investors.
Is EAR Stock a Good Investment?
The two primary attractions to investing in EAR stock appear to be the very low share price and the possibility for over-the-counter hearing aid sales. However, these seem somewhat overshadowed by the chaotic year the business has experienced.
The DOJ investigation and issues with NASDAQ compliance do not inspire confidence in the business. The company’s relationship with key customers has likely been damaged by the former and both factors will make it more challenging for the company to raise money from investors.
With revenue having been on the slide in the company’s most recent earnings update, raising capital might be an important part of Eargo’s future too. The company’s next earnings update is set for release on 8 August and should shed more light on how it is bouncing back from a troubling first half of the year, but at the moment the stock looks like a very risky investment.
