To The Moon

Summary

• $Tempus AI(TEM)$ is a leading player in healthcare AI, aiming to deliver personalized treatment suggestions through its proprietary data model.

• Preliminary Q4 results and 2025 guidance show mixed performance, with revenue slightly below expectations but positive adjusted EBITDA anticipated for 2025, driven by the Ambry Genetics acquisition.

• TEM's strong fundamentals and competitive position, bolstered by the Ambry acquisition, support long-term growth, particularly in diagnostics and expanding AI applications across healthcare.

• Despite valuation concerns and potential competition, TEM's multi-year growth drivers and AI advancements offer significant long-term investment potential for patient investors.

Monty Rakusen

$Tempus AI(TEM)$ is a leading player in the fast-growing healthcare AI industry. While applications are still in early stages, the company’s proprietary data model aims to break down barriers across the industry to deliver personalized healthcare treatment suggestions.

The stock has been volatile since its IPO, which is not uncommon. The company’s close tie to AI technology also adds to sentiment volatility, as fears around “AI hype” are constantly changing.

Data by YCharts

After providing a disappointing financial update to Q4 and early look into 2025 guidance, shares have pulled back well below the $40 IPO level. Fears are likely to increase around the company’s ability to maintain a fast growth rate, though fundamentals appear to be in a strong position.

While the investments around healthcare AI remain early, this is a multi-year opportunity that will likely continue to grow over time. AI applications are early stage, but TEM provides a market leading solution that continues to gain traction.

The stock may remain volatile throughout 2025 given the early-stage nature of the opportunity. However, as argued below, long-term investors may be rewarded by buying on pullback opportunities.

Mixed Preliminary Q4 Results and 2025 Guidance

TEM recently provided preliminary results for its upcoming Q4 report, and while initial revenue came in below expectations, this pullback provides an interesting buying opportunity.

On the financial side, the company reported preliminary Q4 revenue of $200 million, which was ~2% below estimates for $200.57 million, though more importantly, this was below the company’s guidance. Full-year revenue will come in ~$693 million, short of the company’s guidance for $700 million.

Adjusted EBITDA for Q4 is expected to improve sequentially from the Q3 level of -$21.8 million loss. Estimates for Q4 currently point to an adjusted EBITDA loss of ~$4 million, so sequential improvement was already embedded within estimates and the stock price.

Tempus AI

Yes, growth during Q4 still represents 35% yoy, but the miss relative to guidance is notable. Fast-growing companies have the underlying expectation for big revenue beats. Particularly in a time period in which many companies are being questioned on the “AI hype,” missing estimates only fuels this skepticism.

Management provided some brief commentary in the press release.

We concluded 2024 with continued strength in our core businesses, as genomics revenue is expected to grow at ~30% in Q4 and our data and services revenue is expected to grow at ~45%, such that we expect to deliver ~99% of our revenue guidance for 2024 and ~100% of our adjusted EBITDA guidance. Despite some softness in our CRO revenues, our core businesses gained momentum throughout the year.

At face value, the slight miss in Q4, based on the preliminary results, is not the end of the world. A pullback is appropriate given the high expectations for the company.

Deep within TEM’s updated investor presentation was the company’s preliminary outlook for 2025. There are a few moving pieces here and while the headline numbers look strong, one must dive a little deeper to better understand.

TEM expects 2025 revenue to be ~$1.23 billion, reflecting >75% yoy growth. The headline number is materially above the $935 million (34% yoy growth) estimate from consensus, but the company’s outlook now includes the contribution from the Ambry Genetics acquisition.

2025 Guidance Metrics

Tempus AI

Ambry Genetics is a leader in hereditary cancer screening and was Tempus’ main reference lab. Tempus announced the acquisition in Q3, with it now expected to close on February 1. The purchase price was $375 million in cash and $225 million in shares. During 2024, Ambry was expected to generate >$300 million in revenue and >$40 million of adjusted EBITDA.

Now back to TEM’s 2025 guidance metrics.

TEM expects Ambry to grow ~25% in 2025, which would imply ~$375 million in revenue for 2025. With the acquisition expected to close February 1, only 11 of the 12 months of revenue will be included for 2025, implying ~$350 million of Ambry contribution.

The initial 2025 guidance of $1.23 billion thus embeds ~$350 million of inorganic contribution, meaning the true organic revenue of TEM is right around $900 million, which is below consensus estimates for $937 million.

Even within TEM’s presentation notes, they expect TEM’s organic growth “closer to 30%,” which may read as slightly under 30%. For reference, consensus expected growth of 34% yoy.

Nevertheless, adjusted EBITDA is expected to be positive for the full-year, which would include the $40+ million contribution from Ambry.

Overall, mixed Q4 preliminary results and lower than anticipated 2025 guidance fully warrants a stock pullback.

Our revenue and adjusted EBITDA guidance reflect targets and are therefore noted to be approximate values for fiscal year 2025. Given the unique nature of our business, it is difficult to predict these numbers with complete accuracy; as such, the word “approximately” implies a modest range.

The company even acknowledges the difficulty in forecasting revenue. However, the rather disappointing results point to a modest reset in the stock, even though the fundamentals remain healthy. As the company continues to scale its operations, they should benefit from higher incremental margins, meaning each new dollar of revenue growth will become more profitable towards the bottom line.

Remaining Bullish on Fundamentals

Acknowledging that sentiment will now become increasingly mixed, the company’s fundamentals are still in a strong position.

TEM remains in a strong competitive position, and the acquisition of Ambry further underscores the importance of the combination of organic and inorganic investments.

TEM remains adamant that diagnostics will be among the first areas in the healthcare industry that will see material benefits from the advancement of AI. Although TEM originally started in oncology, ongoing investments into the company’s technology provides the potential for expansion into other applications across the healthcare ecosystem. More recently, the company announced expansions into neuropsychology, radiology, and cardiology. The acquisition of Ambry likely helps fuel more expansion opportunities.

Suite of Offerings

Tempus AI Presentation

The company’s proprietary database, which the company calls “Intelligent Diagnostics,” is the key competitive differentiator. By combining the proprietary dataset, next-generation diagnostics, and generative AI, the company aims to provide more accurate and personalized treatment suggestions.

Healthcare information has historically been siloed across the different departments, making data gathering and collaboration challenging. TEM aims to change this process with its Intelligent Diagnostics, synthesizing vast amounts of data to generate personalized healthcare approaches.

Tempus AI

TEM current offers three different product lines: Genomics, Data, and AI Applications. The chart does a great job reviewing each segment and how Tempus is differentiated versus competitors.

Just this past week, the company made a key announcement – its first ever whole-genome sequencing test, named xH. The company continues to build off its AI-enabled diagnostics platform to help generate personalized treatment decisions for healthcare professionals. Currently, xH is available for research use only, though it is expected to be clinically available within the next year.

This test marks Tempus’ first foray into adopting whole-genome sequencing as a platform, supporting clinicians with detection of all clinically-relevant variants and advancing the landscape of personalized therapy, specifically in hematological oncology.

Again, this is an early-stage opportunity for the company, but ongoing advancements around its AI platform add to the multi-year growth drivers. Fundamentally, the company is well positioned to capture ongoing investments into AI across the healthcare ecosystem.

Valuation

TEM remains an early-stage investment opportunity for those looking to gain exposure across AI within healthcare. Given the material greenfield opportunity, investors are expecting high growth over the coming years, which leads to a premium valuation multiple.

2025 is shaping up to be a strong year in terms of advancing this opportunity and improving the financial standing. Driving adjusted EBITDA profitability is a big step in the right direction.

Chart

Data by YCharts

Over the course of the year, investors should expect some volatility. As seen with many recent IPOs competing in a nascent industry, determining the appropriate valuation is nearly impossible.

The stock currently trades around 6.5x forward revenue, which can be daunting for many investors, particularly when the company just provided somewhat disappointing Q4 results and 2025 guidance.

Nevertheless, I believe long-term investors will be rewarded with this potential AI winner. There are many multi-year growth drivers at play and given the lack of certainty around revenue visibility, there are likely to be some quarterly misses. However, the long-term trend remains positive.

One of the biggest risks to the company is lack of revenue visibility. If the company were to keep reporting disappointing results, investors may start to lose faith and sell the stock. While the company guided to positive adjusted EBITDA in 2025, ongoing losses may weigh on shares as fears over liquidity could potentially rise. Raising capital to support operations can be an expensive endeavor.

Additionally, competition is likely to increase in this space. As the broader healthcare industry begins to invest more into AI, this may draw more competitors to the space. Even if TEM grows to become the market leader, by validating this space, larger players may soon join the market.

Source: https://seekingalpha.com/article/4749567-tempus-ai-disappointing-q4-preliminary-results-but-bullish-fundamental-update