1 US penny stock I’m avoiding like the plague

This medical penny stock’s trying to capture a $100bn market opportunity after recently receiving FDA approval. But personally, I’m not touching it.

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Penny stocks offer some of the most explosive growth potential in the stock market. That’s why these tiny enterprises are so popular. However, they also come paired with tremendous risk, even if the business offers a product or service that seems game-changing.

Outset Medical (NASDAQ:OM) seems to be a perfect example of this. With a market capitalisation of just $63m, the room for growth seems to be quite impressive. Even more so given the firm’s goal of simplifying and reducing the cost of dialysis with its Tablo system.

Yet, despite all this potential, the Outset Medical share price has been seemingly heading in just one direction – down — and I’m definitely not interested.

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A failure of management

It’s hard to argue that the Tablo system is a phenomenal piece of medical technology. Typically, patients suffering from kidney failure have to go to hospitals or clinics to get treatment. However, with Tablo, the entire process can be done from the comfort of home without the need for a medical professional.

That certainly sounds like an exciting investment opportunity, especially since the global dialysis market size is estimated to be worth over $100bn. Yet in the last few years, this opportunity has turned into a bit of a nightmare. In fact, since the start of 2022, Outset Medical’s share price has collapsed by 97%, placing it firmly within penny stock territory.

A few things went wrong here. A new study found that GLP weight-loss drugs, like Ozempic, could be used as a viable alternative to dialysis for patients suffering from kidney failure. This revelation understandably spooked investors in dialysis companies like Outset Medical and Abbott Laboratories.

However since 2022, Abbott’s only down around 18%. That’s not great. But it’s massively better than what Outset has delivered.

Outset’s collapse seems to be tied to a complete loss of faith in management. Leadership failed to file the proper paperwork with the FDA on time, creating regulatory delays. A few months later this issue was resolved, and a new partnership with the US’s largest private dialysis provider seemed to have put the firm back on track.

Yet a few months after that, disaster struck once again with disappointing results and the announcement of a complete revamp to the group’s go-to-market strategy that could take “several quarters to fully implement and realise fully”.

In other words, Outset appears to be taking one step forward, two steps back. And investors’ patience has disappeared.

Hope for a comeback?

Looking at this business, it’s not all bad news. The threat of GLP drugs may be a bit overblown. There’s still a lot of research that needs to be performed, and clinical studies could take years to measure long-term impacts. In the meantime, demand for dialysis machines, especially portable ones like Outset’s Tablo Cart, isn’t likely to disappear.

Management switching tactics is frustrating. But changing course may be necessary. After all, if the current plan isn’t delivering results, there’s no point continuing with it.

Right now, the penny stock’s trading at a forward price-to-sales ratio of 0.6. That’s pretty cheap, indicating that the bar has been set very low, opening the door to an explosive comeback if management can get things back on track. However, personally, I’ll believe it when I see it at this stage.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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