Aiforia H1'24: Growth is still gathering momentum

This report is a summary translation of the report “Kasvu kerää vielä vauhtia” published on 8/29/2024 at 10:10 pm EEST.

Aiforia's revenue growth stalled in the first half of the year, particularly in the US, although recent months’ customer wins  suggest that the company is continuing to capture the market. Our near-term forecasts have been reduced significantly and we now see a more likely need for additional capital, but customer wins and good sales prospects have improved visibility on revenue growth. After the share price increase (+17%), we think the stock looks quite correctly priced. We reiterate our EUR 4.6 target price and switch our recommendation to Reduce (previous Accumulate).

Positive news flow still not much reflected in revenue

Aiforia's H1 revenue grew by 43% to 1.37 MEUR (Inderes: +110%). The growth came exclusively from Europe, while in the US, contrary to our forecast, revenue decreased. Although a significant part of the current customer wins will not be seen in revenue until H2'24-2025, the ramp-up of new customers seems somewhat slower than expected. Aiforia’s order book increased by 34% to 3.2 MEUR. Profitability and cash consumption were close to expectations (revenue
-6.1 MEUR, net cash 11 MEUR). With several tenders in Europe, the positive news flow can be expected to continue.

Digital pathology is catching on, but it is difficult to predict how fast the market will develop

Digitizing pathology is at a very early stage, with only 14% of pathology samples being digitized worldwide until 2020. The technological limitations that were an obstacle have largely vanished with time. With an aging population, the need for pathology analysis is rising and a shortage of pathologists already exists, creating clear demand drivers for solutions that increase efficiency and capacity. The competitive landscape in the young market is still evolving. With Aiforia's product’s competitive strengths (customizability, cell-level detection, first commercialized predictive AI model) and significant clinical references, we believe Aiforia has clear potential to become one of the market's long-term winners.

Customer wins have already paved the way for clearly stronger revenue growth, but customer processes are slow

The H1 results show that some of the risks to the timing of Aiforia's growth have materialized, especially in the US, and we have revised our forecasts for the coming years to a more cautious stance (revenue -20-30%, EBIT -5-70%). We now expect customer wins to be more clearly reflected in revenue in 2025-28, when the product portfolio is likely to expand with CE marking and customers will have had time to extend the use of Aiforia to more of their pathology laboratory workflows. We then expect very high annual revenue growth of 60-75% and EBIT margin to strengthen from a loss-making investment phase to 7% in 2028. We expect revenue in 2030 to already be 57 MEUR (target: >100 MEUR ~2030). Of course, this will require Aiforia to execute a very strong strategy and continue to win new customers.

We move aside at current prices to wait for the delayed acceleration in revenue growth

Aiforia's valuation (2024-26e EV/S 36-15x) relies on expectations of very strong and scalable growth. By pricing growth at various rates and confidence intervals we can justify a wide range of EUR 1.4-7.7 per share (previously EUR 1.4-8.0). Based on the evidence we have received, our confidence in the company’s long-term growth is high. The risk is increased by the uncertainty of the growth rate (partly realized in H1), which affects the development of the cash position (a share issue now seems more likely). Nevertheless, new customer wins have provided a further growth base and reduced forecast risks (WACC-13.1% -> 12.7%). In our view, the new customer wins and CE approvals we expect justify the current valuation of the stock, but as growth continues to accelerate, we do not see any justification for a materially higher valuation in the near term, so we prefer to wait for the risk/reward ratio to improve.