In mid-August, around two months after Tempus AI’s (NASDAQ: TEM) initial public offering (IPO), the stock was up a marvelous 93%. However, shares have experienced wild volatility and are now 8% below their opening price of $37 as of the Dec. 18 close.
Overall, Wall Street analysts seem to believe shares have fallen much too far. The average price target implies shares could rise 74% from their Dec. 18 closing price. A recently released $74 price target from Guggenheim is particularly bullish. It indicates over double-bagger upside. So, is the plummeting share price of Tempus an opportunity to get in on the dip? I’ll provide a brief overview of Tempus AI’s business and the progress it has made since going public and give my overall take on the name.
Tempus: Genetic Cancer Testing and Data Driven by AI
Tempus AI is a healthcare company that helps fight cancer. It does this by running genetic tests and looking for mutations and other abnormalities in genetic code. Cancer arises from human cells deviating from their normal processes. This deviation is often caused by alterations in a person’s DNA, as these are the instructions that regulate cells. By detecting genetic abnormalities, the company can find early signs of cancer.
Through the company’s genetic testing, it has developed a massive database of genetic data. The company also integrates patient data from free sources and healthcare providers. The company uses AI to analyze all this data. It aims to improve its tests' insights and create personalized recommendations for each patient. It also sells its data to drug developers, helping them improve preclinical discovery and clinical trial design.
Financial Results and Ambry Acquisition Show Strength
The company divides its revenue between its genetic testing and the data and services it sells. Tempus generated revenue from running the tests initially. Then, Tempus can sell that data to drug developers. Over time, the revenue generated from selling the test data becomes several times larger than the initial testing revenue.
Last quarter, genomics testing revenue accounted for 64% of total revenue. However, the 64% data and services revenue growth rate was over three times higher than the 20% genomics revenue growth rate. The data and services growth rate sped up significantly, while the genomics growth rate slowed a bit. Last quarter, overall revenues grew at a brisk and accelerating pace of 33%.
Preliminary guidance from Tempus indicates revenue growth of 24% in 2025. The company also expects its adjusted earnings before taxes, depreciation, and amortization (EBITDA) to turn positive. Much of this will come from the solidly positive EBITDA of Ambry Genetics, which Tempus is acquiring. The slower growth rate is also largely due to Ambry's relatively slower growth rate compared to the core Tempus business. The deal is set to close in Q1 2025.
Tempus aims to expand its capabilities in hereditary genetic cancer testing through this acquisition. Ambry also tests in other areas, like rare diseases, cardiology, and reproductive health. This deal does several positive things for Tempus. It increases the number and types of testing Tempus can administer. This will bring a larger amount of data into Tempus' platform as Ambry performs tests on around 400,000 patients per year. Over time, Tempus can sell this data to generate revenues several times more than the revenues generated from the tests. The company will likely also be able to find new drug developers to whom to sell its data that work on diseases other than cancer.
Additionally, 95% of Amrby’s testing volume comes from being an in-network provider. Tempus’s tests are largely out of network. This means patients have large out-of-pocket costs. Tempus could leverage Amrby’s relationships to get more in-network coverage. This would make it less expensive for patients to access Tempus’s tests, expanding its market. This may already be working. The company announced on Dec. 18 that it signed in-network agreements with multiple healthcare organizations.
Tempus AI Stock Looks Ready to Recover
Overall, Tempus appears to be getting stronger, but its value has stagnated. The company’s massive amount of data and ability to accumulate more gives it a strong competitive advantage in this space. To me, the stock feels poised for a significant rebound. However, this recently post-IPO stock is likely to continue being highly volatile, a key consideration.
