Why Shockwave Medical Is Not a Buy

Shockwave Medical (NASDAQ: SWAV) is a young start-up with fantastic growth rates. The company is quadrupling revenues from this time last year, up 339%. It has almost no debt ($17 million) and plenty of cash ($125 million). Yes, it's unprofitable, with a startlingly bad profit margin of negative 173%. But that's OK. It's early in the story, and the company should be pursuing revenue growth.

It's a good idea to use a Rule of 40 analysis to keep from getting too excited about how fast a company is growing. To apply the Rule of 40, you add revenue growth to the profit margin. Any result over 40 is great. The venture capitalists who invented this rule apply it to software as a service (SaaS) start-ups. But you can apply it to any fast-growing company because the underlying issues are the same.

Adding the positive revenue growth to the negative profit margin, Shockwave Medical has a Rule of 40 number of 166, which is an outstanding number, four times higher than the ordinary standard for excellence. So what does this company do?

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Source Fool.com