With the recent market sell-off, now is potentially the time for investors to find their next big winner. After all, if one had invested in stocks during the bear markets of late 2018, the Covid drawdown of 2020, or the interest rate driven drawdown of 2022, you likely would have made out quite well.

Coming off a late-year slowdown and short-seller attack, this disruptive medical tech stock is currently over 60% off its all-time highs set just last year. But with recent better-than-expected Q4 results and a thorough refuting of the short case, is now the time to pick up shares of this turnaround stock?

TransMedics' rocky 2024: opportunity in 2025?

TransMedics Group (TMDX 1.97%) was founded in 1998, but has only been a public company since 2019. Its novel organ care system (OCS) is a new and unique way of preserving organs for transport. As opposed to freezing, TransMedics' OCS keeps organs "alive" through perfusion, a method of circulating warm, oxygenated and nutrient-rich blood through the organ during transport. This new method has been shown to improve the percentage of donated organs that can be utilized, with less permanent damage, and it also allows medical technicians to monitor the health of the organ during transport.

It was only seven months ago that TransMedics rode rapid gains in market share to an all-time high. However, things turned downward in a big way beginning in the second half of last year.

In Q3 2024, TransMedics reported a slowdown and decline in margins, which brought up a number of concerns. Management attempted to put to rest worries over competition or execution issues, saying that the slowdown can mainly be attributed to the quarter-to-quarter variability in overall U.S. transplants. On top of that, TransMedics has also been investing in its own proprietary logistics network by purchasing planes, and unscheduled third quarter maintenance needs increased costs unexpectedly.

On top of the "bad" quarter, a short-selling hedge fund called Scorpion Capital released a short report on TransMedics in early January, amplifying the stock's decline. The short report listed a number of allegations, including inflating prices to customers, "kickbacks" in exchange for usage, and growing competition.

The combination of a slowdown, the short seller attack, and the recent market jitters have all conspired in a big drop for TransMedics' stock. But has this opened up an opportunity?

Recent results seem to put concerns to rest

TransMedics' recent fourth quarter report was encouraging. While growth did continue to decelerate on a year-over-year basis and management guided to another deceleration in growth this year, the results did come in better than expected.

Q4 revenue grew 50% to $121.6 million, with earnings per share of $0.19 -- both handily ahead of analysts' estimates.

Admittedly, those estimates had come down after the prior quarter's disappointment, and revenue growth was still a deceleration from the 64% seen in the prior quarter and 83% for the full-year. It also may be troubling that the company guided for "just" 20%-25% growth in 2025.

Nevertheless, the solid print and likely conservative guidance should be encouraging, especially given how far the stock had fallen. In addition, TransMedics revealed it had hired an outside legal firm Kirkland & Ellis LLP, who in conjunction with outside experts conducted a thorough review of the short-seller attacks. The report concluded there was no evidence of misconduct. TransMedics also delivered a long and convincing response to Scorpion's petition to the FDA, along with specialist legal firm Covington & Burling LLP.

Image source: Getty Images.

The bull case

Even though things have slowed a bit, TransMedics is still growing at a high rate, and appears to be taking market share. Management noted that across its three main organs of liver, heart, and lung, TransMedics' transplant market share grew from 13.8% to 20.9% in 2024. While overall growth is slowing, it could be that the law of large numbers is beginning to kick in, rather than competitive or product concerns.

In addition, there could be two big catalysts coming later this year, those being TransMedics' next-generation heart and lung OCS programs. Currently, the majority of TransMedics' revenue comes from liver transplants, at around 70% of 2024 revenue, followed by heart at 25% and lung at 5%.

Encouragingly, all segments grew strongly in 2024, suggesting increased adoption of OCS. However, liver actually grew the fastest, despite being the largest segment. That could perhaps raise questions over the degree of advantage OCS has in heart and lung patients over traditional solutions.

However, management noted that the two new heart and lung OCS systems were set to hit the market in the second half of this year, which could be a "game-changer" for these two segments. And management only forecast mild contributions for the new programs in its 2025 outlook, saying the new systems will account for 2% to 5% of the 20%-25% anticipated revenue growth.

In addition, TransMedics' costs were elevated in the second half of 2024. Part of this was due to scheduled maintenance on its planes, which TransMedics had only begun acquiring in late 2023. That dragged down overall margins. But on the recent fourth conference call, management said it was only going to buy one more plane this year, bringing its total to 22. The focus will now turn to utilization and efficiency in 2025, in contrast to the less-efficient "building" year of 2024. That should increase service margins in 2025.

Meanwhile, TransMedics' valuation has come down a lot, to 5.5 times sales and 45 times this year's earnings estimates.

That's not a demanding valuation if TransMedics can hit its longer-term guidance of 10,000 transplants in 2028, marking a 28% average growth rate over 2024's 3,715 transplants.

Risks abound, however

There are of course lingering risks to the TransMedics thesis right now. First, the short report and rebuttal are still pretty recent, so the refutations of the short accusations are not exactly a "settled" matter.

Second, while OCS has been shown to improve outcomes, it's also a more expensive solution. As with all pharmaceutical and biotech stocks, the high costs of healthcare in the U.S. could spur a pushback on prices. And high prices may also encourage competition. For instance, while TMDX was first to market with a well-functioning liver perfusion transplant device, a new privately held competitor OrganOx just raised $142 million in capital last month.

Finally, TransMedics' growth path implies a higher growth rate through 2028 than the company has guided for this year. Going back to the law of large numbers, it's hard for a company to grow faster as it gets bigger.

One key factor will be if the new heart and lung programs can improve the penetration rate for those organs, but that won't be known until at least the end of this year.

TransMedics is a story to watch

While there are a number of risks that need to be monitored, TransMedics looks like a name to watch in 2025. If the renewed heart and lung OCS programs can kick-start greater adoption for OCS in those organs, the company may be able to reaccelerate growth into 2026.

If that happens, then the Street-average price target of $102 could be in reach, and the Street-high price target of $125, amounting to nearly 100% gains, could be a possibility, too.