The Renalytix AI (LSE: RENX) share price has done very well over the past 12 months, gaining around 160%. That is an outstanding performance. After that heady increase in the Renalytix share price, here is what I would do next.
The Renalytix share price reflects optimism
It wasn’t just last year that the company’s share price soared. In 2019 it also did well. Since it listed in 2018, the company’s shares have increased from 120p to reach 920p at current prices. That means the shares have risen more than sevenfold in little more than two years.
The market obviously likes the company’s AI-enabled diagnostic toolkit. As the name suggests, it has a focus on kidney disease. That sort of clear medical focus means there is a well-defined market. Using scalable AI and other tools to target deep-pocketed medical providers could clearly be a profitable market. This optimism is reflected in the share price.
However, the company’s financial statements reflect that for now at least, the model remains unproven. The company doesn’t make any revenue, and its running costs mean that it has been loss-making for a number of years. That is common among early-stage startups developing new technology. But with a market capitalisation of over half a billion pounds, clearly there are high expectations in some quarters for Renalytix’s future sales and profits.
The company expected commercial testing sales to begin in the current financial year. The commercial launch was in September in a well-known New York City hospital. So over the course of time, it should be clearer what the product’s market potential is. There should also be more information on likely profitability. While AI can deliver significant benefits at reduced cost for medical diagnostics, that is not always the case. It depends in part on how widespread adoption is, as well as the pricing structure. So for now, it is difficult to judge the likelihood of future success for the business, unlike a more established medical company with a wide product portfolio, such as GlaxoSmithKline or AstraZeneca.
Why I won’t buy yet
After such a runup in the shares, hopes are clearly high for the company. However, I see a lot of potential pitfalls.
The company’s flagship KidneyIntelX product could be delayed as it moves into commercial production. Adoption may be slower than expected. There may be pricing competition from other companies in the diagnostics field. These are all usual things when a medical diagnostic company launches a new product, and on their own, they wouldn’t necessarily concern me. But any such setback could hurt the Renalytix share price. There is also the chance that the company’s technology, which has US regulatory approval for testing services, performs well, and sales grow rapidly.
But at the moment, I find it hard to value the shares as there are so many unknown variables. Focussed for now on a single product, which has not yet seen widespread commercialisation, the Renalytix share price could well be more volatile than I like. That is why I will sit this one out until the company starts to produce substantial revenues. I would prefer to find a medical share with a more proven ability to commercialise its technology and make a profit.
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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.