Tempus AI Stock Surges 23% in 6 Months: Should You Snap It Up Now?

Tempus AI TEM, an innovator in artificial intelligence-based healthcare solutions, has been attracting investors' interest since its successful IPO in June 2024. The company’s stock has demonstrated impressive growth over the past six months, fueled by investor enthusiasm for AI-driven advancements and the company’s interesting financial performance.

In the past six months, the stock has rallied 22.8%, outperforming the 16.5% rise of the Medical Info Systems industry and the benchmark’s 6.8% increase. In the meantime, the Medical sector has declined 9%.  The company has also outperformed other players in the health infotech field, like iRhythm Technologies IRTC and SOPHiA GENETICS SOPH, which declined 3.8% and 32.3%, respectively, during the said period.

Six-Month Share Comparison

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The market’s appetite for AI applications in healthcare is rapidly increasing, with Tempus AI emerging as a top contender in this high-growth sector. Analysts cite the company’s cutting-edge product lines and strategic plans as key differentiators, which position it for long-term success.

TEM's Robust Q3

In the third quarter of 2024, TEM’s Genomics unit growth accelerated 23.9% year over year, banking on unit growth pick up. Data and Services revenues accelerated 64.4% year over year, primarily led by Insights or the data licensing business, which improved 86.6% year over year. The company’s large clients, having big three-year data license, were seen opting for renewal.

Overall, the business performed well in the third quarter, as demonstrated by accelerating volume growth in the genomics business and accelerating revenue growth in the data and services business, specifically within Insights.

Strong 2024 Outlook

Tempus continues to expect 2024 revenues of approximately $700 million, implying approximately 32% year-over-year growth, and -$105 million in adjusted EBITDA, an improvement of approximately $50 million over 2023.

Compelling Acquisition

Tempus is also optimistic about its plans to acquire Ambry Genetics, a genetic testing player. Under the terms of the agreement, Tempus will pay $375 million in cash and $225 million in shares at closing, of which $100 million will be subject to a lock-up agreement until one-year post-transaction close. Ambry expects to generate more than $300 million in revenues in calendar year 2024 and EBITDA of over $40 million.

Ambry is a leader in hereditary cancer screening and currently serves as Tempus’ main reference lab in this category. The acquisition will provide Tempus with expanded testing capabilities for inherited cancer risk. In addition to expanding and enhancing the company’s hereditary screening portfolio, the acquisition of Ambry will complement Tempus’ strategy of using data to advance clinical and scientific innovation. Ambry’s extensive product offerings will also allow Tempus to expand into new disease categories, including pediatrics, rare diseases, immunology, women’s reproductive health and cardiology.

Improving EBITDA Track

Tempus AI delivered adjusted EBITDA of -$21.8 million in the third quarter, which was a $14.4 million year-over-year improvement and also a significant improvement quarter over quarter. According to the company, it is well on track to improve EBITDA down the line. The entire business is growing at a rate of more than 25%, which is meaningful in generating significant EBITDA going forward.

Cash Flow Trend

The company’s cumulative operating cash outflow was $149.7 million at the end of the third quarter of 2024, an improvement from $174 million of outflow a year ago. According to the company, the business is synergistic across all its products, from Genomic sequencing to Data business and AI Applications business. This accelerates the company’s path to positive cash flow.

Positive Estimate Revision Trend

Earnings estimates for Tempus AI have improved from a loss of $2.64 per share to a loss of $1.51 per share for 2024 over the past 60 days, with four upward revisions in contrast to no downward movement. For 2025, estimates have improved to a loss of 68 cents per share from a loss of 79 cents per share in two months following two upward and two downward revisions.

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TEM Stock Not Cheap

TEM’s stock is currently slightly overvalued compared to its industry, as shown in the chart below.

TEM is currently trading at a forward 12-month price-to-sales (P/S) ratio of 7.09, a premium to the broader industry's average of 3.34X. Even the stock is trading higher than other industry players like IRTC (4.24X) and SOPH (2.48X).

However, it is still below its one-year median of 8.74X, implying it could still be a good opportunity to buy.

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Our Take

With the AI market projected to grow exponentially in the coming years, Tempus AI is well-poised to capitalize on expanding opportunities. In a recent breakthrough, the Centers for Medicare and Medicaid Services (CMS) announced that it would allow reimbursement for assessments of cardiac dysfunction using the Tempus ECG-AF algorithm. ECG-AF is one of just a few FDA-authorized medical technologies in the country to be impacted by the new CMS decision, and this milestone allows Tempus to more broadly support clinicians in identifying patients at increased risk of atrial fibrillation/flutter. With a strong financial outlook and efforts to improving healthcare outcomes, TEM presents a unique opportunity for investors seeking high returns from the AI and healthcare sectors.

Although the expensive valuation cautions investors, upward revisions in earnings estimates reinforce TEM’s Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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iRhythm Technologies (IRTC): Free Stock Analysis Report
 
SOPHiA GENETICS SA (SOPH): Free Stock Analysis Report
 
Tempus AI, Inc. (TEM): Free Stock Analysis Report

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