Muddy Waters is short Inogen, Inc. (INGN) because we believe management has created an egregiously false narrative about the Total Addressable Market (“TAM”) size and growth. We estimate the U.S. market is 1.3 million users. The data shows us that the market is actually shrinking. We believe that even though POC penetration will continue to increase, because the market is near saturation and is shrinking on one hand and the long usable lives of equipment on the other, INGN will hit peak sales no later than next year.
INGN embodies much of what is dysfunctional about today’s capital markets: Misleading statements by management, shoddy market research presented as authoritative, thorough sell-side capture, and of course significant enrichment of insiders through stock sales. The key to INGN’s extreme multiple is its blue-sky story – namely that its U.S. TAM is approximately three million users and growing at 7% – 10% annually. INGN presentations often state both estimates, which are the work of an obscure research firm called WinterGreen Research, Inc. These estimates appear to have little grounding in reality. We reviewed the 2017 WinterGreen report, and frankly feel it is middle school student quality, replete with misspellings, poor grammar, bizarre statements of fact, and even outright plagiarism from the New York Times. As we write this, it is hard not to laugh thinking about how many serious analyst reports and company presentations have been prepared effectively based on this work. INGN management should know better than to take WinterGreen’s work as authoritative.
We calculate the real U.S. TAM is presently approximately only 1.3 million users, which is 57% lower than management’s claim. Our estimate is derived from Centers for Medicare & Medicaid Services (“CMS”) data. CMS data also shows the oxygen therapy market has been shrinking. We estimate that from 2010 to 2017, the market shrank at a CAGR of -2.6%. This is a far cry from the estimates of 7% – 10% positive growth the company has been making since November 2013. In our view, management has created a false narrative by presenting poorly-sourced estimates along with misrepresenting data from credible sources.
We expect INGN sales to peak no later than next year. While POC penetration rates should continue to rise, the mix of B2B sales likely imposes a significant barrier to further growth. POCs sold to B2B customers have an estimated six-year usable life, meaning that each is likely to serve multiple users in its lifetime. We see China as unlikely to materially change the picture for INGN. Accordingly, we think INGN is reaching peak sales in 2019 or 2020. There is no justification for an 8x sales multiple, let alone any valuation based on a sales multiple. At our forecast of peak earnings, we value INGN at $46 per share, a 67% decrease from its current price.
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