Eargo (EAR) aims to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.
San Jose, California-based Eargo was founded to develop modern hearing aid products that can be worn in the ear in a virtually invisible manner, reducing the stigma of hearing loss treatments.
Management is headed by president and CEO Christian Gormsen, who has been with the firm since 2014 and was previously at GN Group, an intelligent audio solutions company.
Below is a brief video of Eargo’s product commercial:
The company’s primary offering is its Neo HiFi in ear hearing aid.
Eargo has received at least $153 million from investors including New Enterprise Associates, Maveron, Future Fund, Pivotal Alpha, Cooperative Glide Healthcare, Longitude Venture Partners and The Charles and Helen Schwab Living Trust.
The company markets its hearing aid directly to consumers via online and offline media and a dedicated team of licensed hearing professionals.
Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, more than doubled to 0.7x in the most recent reporting period.
According to a 2019 market research report by Grand View Research, the global hearing aid market was an estimated $5.3 billion in 2018 and is projected to grow at what appears to be a moderate rate through 2025.
The main drivers for this expected growth are improved technological solutions combined with a growing elderly population increasing demand for hearing enhancement devices.
Also, the chart below shows the historical and projected growth of the U.S. hearing aid market by product type from 2014 through 2025:
Major competitive or other industry participants include:
- GN Store Nord (GGNDF)
- Sonova (SONVF)
- William Demant
- WS Audiology
Eargo’s recent financial results can be summarized as follows:
- Growing topline revenue, at an accelerating rate
- Sharply increased gross profit and gross margin
- Reduced operating losses and lower negative operating margin
- Uneven cash used in operations
Below are relevant financial results derived from the firm’s registration statement:
Source: Company registration statement
As of June 30, 2020, Eargo had $8.3 million in cash and $45.3 million in total liabilities.
Free cash flow during the twelve months ended June 30, 2020, was negative ($37.1 million).
Eargo intends to raise $100 million in gross proceeds from an IPO of 6.66 million shares of its common stock, offered at a proposed midpoint price of $15.00 per share.
Assuming a successful IPO, the company’s enterprise value at IPO would approximate $542.1 million, excluding the effects of underwriter over-allotment options.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 18.97%.
Management says it will use the net proceeds from the IPO as follows:
We currently expect to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund sales and marketing, including launching new marketing channels and further expanding our brand efforts, and to fund research and development activities. The remaining funds will be used for general corporate purposes, including working capital, operating expenses and capital expenditures.
Management’s presentation of the company roadshow is available here.
Listed bookrunners of the IPO are J.P. Morgan, BofA Securities, Wells Fargo Securities and William Blair.
Eargo is seeking public capital market funding to continue its growth plans.
The firm’s financials indicate strong and accelerating topline revenue growth and a turn toward lower operating losses. Cash used in operations is still significant.
Sales and Marketing expenses as a percentage of total revenue are dropping; its Sales and Marketing efficiency rate has more than doubled. Both signify increasing efficiencies.
The market opportunity for providing improved hearing aids is substantial and expected to grow as the global population ages and needs hearing enhancement.
The U.S. market appears to have a significant growth trajectory ahead of it, no doubt as the baby boomer generation retires at the current average rate of 10,000 per day. This market represents Eargo’s primary market.
J.P. Morgan is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 65.6% since their IPO. This is a top-tier performance for all major underwriters during the period.
As to valuation, compared to Sonova, Eargo is growing revenue at a far higher rate of growth.
Additionally, Eargo is selling to the market using a DTC or direct-to-consumer business model, where the firm obtains greater data on its customers and presumably has higher gross margins at scale.
EAR has produced impressive growth results, especially during the Covid-19 pandemic and its direct-to-consumer model appears to be working well.
The IPO valuation appears reasonable given its growth trajectory, so my opinion is a BUY at up to $15.00 per share.
Expected IPO Pricing Date: October 15, 2020
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(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)
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