Semler Scientific: Booking Some Profits After Bitcoin Strategy

Summary Semler Scientific’s stock has surged 100% due to its Bitcoin strategy, adding diversification and potential capital appreciation, despite inherent crypto volatility. SMLR’s Bitcoin holdings, valued at $147M, enhance its market cap and balance sheet, offering a hedge against inflation and attracting new investors. Risks include Bitcoin’s price volatility and regulatory uncertainties, which could decouple the Company’s stock price from its core business fundamentals. I maintain a conviction level of 3/5, adjusting Buy levels but keeping Sell targets, aiming for a “house money” position for long-term investment. It has been over two years since my previous Semler Scientific ( SMLR ) article , where I examined the company’s strong financial performance, despite its stock price falling significantly from its 2021 highs. Semler’s flagship product, QuantaFlo, has established itself as a valuable tool for diagnosing peripheral arterial disease ((PAD)), leveraging a SaaS subscription model to deliver robust profitability and consistent growth. I highlighted the company’s potential to expand QuantaFlo’s applications to broader cardiovascular conditions, as well as its strategic partnerships and investments in complementary technologies like Insulin Insights and Discern for Alzheimer’s detection. Focusing on its unique position in an underdiagnosed market, I discussed why Semler appeared to be significantly undervalued based on intrinsic valuation models, presenting a compelling case for long-term investment. At that time, SMLR was trading around $33 per share, and I was happy to amass a healthy position to put in the Compounding Healthcare Investing Group’s “Bio Boom” speculative portfolio. Since then, SMLR has been up roughly 100%, but the market’s appetite for the ticker appears to be due to the company’s attraction to accumulating Bitcoin ( BTC-USD ) as part of its financial strategy. This has added another dimension to the investment thesis. Although I am not an expert on all things crypto, the inclusion of Bitcoin in their balance sheet opens the door to capital appreciation and diversification. Thankfully, Bitcoin has recently breached $100K, so their strategy appears to be working for the time being. The risk and volatility that go with crypto will make SMLR an unpredictable ticker to manage; however, it could provide plenty of opportunities to book profits, while still achieving my goal of a “house money” position. In fact, I decided to book some profits after SMLR cleared my Sell Target 1, and the market cap became completely disconnected from the valuation of their core business. Although I am enjoying the enhanced shareholder value and a potential hedge against inflation, I must reevaluate my SMLR strategy as the share price rapidly approaches my Sell Target 2. I intend to review Semler’s Bitcoin endeavors, and how it impacts the company’s valuation. In addition, I will discuss some of the risks associated with Bitcoin. Finally, I formulate a new strategy for my SMLR position as it continues to trade in union with the price of Bitcoin. Background On Semler’s Crypto It looks as if Semler started their updated Bitcoin acquisition strategy this year, to diversify their balance sheet and take advantage of Bitcoin’s long-term growth prospects. As of December 5th, Semler has acquired a total of 1,873 Bitcoin, valued at about $147.1M, with an average purchase price of $78,553 per Bitcoin. The company’s most recent purchase was 303 Bitcoin costing $29.3M, at an average price of $96,779 per coin, so it is apparent that the company is confident that BTC will continue its upward trajectory. After reading the company’s recent earnings transcript and BTC press release, I think it is safe to say that Semler is committed to this strategy in order to help boost shareholder value. The company is tracking their “BTC Yield” as a key performance indicator ((KPI)), which is the percentage change in their Bitcoin holdings compared with SMLR’s diluted share count. The company’s recent update stated that their BTC Yield of 78.7% from July to December 2024. Clearly, the BTC Yield metric is not a traditional financial measure, such as ROI, or another metric that can reveal their operational performance. However, it should provide investors with some understanding of the potentially accretive nature of the Bitcoin transactions, which they are funding with operational cash flow and proceeds from their at-the-market ((ATM)) offering. By buying nearly 1,900 Bitcoins valued at over $147M, Semler has found a nontraditional route to boost their market cap. Some Benefits of Bitcoin At first, I was a bit worried about Semler’s adoption of Bitcoin as an asset. Yet, I must admit it is arguably the simplest way to bring some diversification to the company and potentially unlock value from their cash position. I often applaud when a company is able to diversify their products and services as long as there is some synergy, or a new endeavor is an escape pod if the company’s core market is deteriorating. Although Bitcoin is a bit unorthodox, it is an asset that can quickly accrue value in a very liquid market that is always open. So, it is an investment that is easy to buy and sell. Yes, the Bitcoin market is volatile, but one could argue that it carries less risk than acquiring another company or investing in a new technology. In addition, Bitcoin provides a hedge against inflation due to its potential to value that can outpace inflation, and buffer against macroeconomic volatility. Semler was able to capitalize on advantageous buying opportunities, and they now have the benefit of Bitcoin’s growing popularity among institutions, which should provide some support as well as liquidity. Another benefit to highlight is Bitcoin’s popularity as an alternative investment, and as a “digital gold” alternative, which could attract new investors to SMLR. Indeed, it would be a bit odd if an investor decided to establish a position in SMLR just for the Bitcoin exposure; however, it is likely new investors have found the ticker after the company announced their plans to amass a Bitcoin position. The company is profitable through their core business, so some new investors might see SMLR as a vessel to have exposure to Bitcoin, but with the added benefit that the company has a source of income… interestingly, one could argue that Semler’s core business could be seen as a hedge against the risks of cryptocurrency. I will also point out that Semler’s Bitcoin holdings are valued at over $147M, which has bolstered the company’s market cap. More importantly, the increased value of their Bitcoins has translated to unrealized gains, which in turn, has improved the company’s fundamentals. Bitcoin’s value should improve the company’s balance sheet and potentially increase their Enterprise Value ((EV)). Furthermore, the company’s price-to-book ratio should improve since they have added tangible liquid assets to their portfolio. Last but not least, Semler could use their Bitcoin holdings as collateral to secure loans or use it as leverage for crypto-based financing options to raise capital for future growth initiatives. Crytpo Strategy Risks Semler’s Bitcoin activities could strengthen the company’s cash reserves to be used for strategic acquisitions, R&D expansion, or simply boost the company’s value to improve shareholder returns. On the other hand, Bitcoin has a multitude of risks including price volatility and regulatory uncertainties, which could inject some randomness into SMLR’s valuation and impact investor sentiment. In addition, I have to point out that SMLR’s recent price action has been driven more by speculation on its Bitcoin holdings rather than the performance of their core business. This decoupling of core business fundamentals from stock price movements creates volatility, with market participants reacting more to Bitcoin’s performance than to the revenue generated by the QuantaFlo system. While Bitcoin’s appreciation can buoy Semler’s market cap, any downturns in cryptocurrency markets could lead to substantial losses, even if the company’s core business remains solid. As a result, Semler and its shareholders need to remain hyper-vigilant regarding Bitcoin’s price action and any updates from regulators. One bad headline could quickly erode Semler’s unrealized gains, which would also be reflected in the share price. Furthermore, SMLR shareholders will need to consider a balance between the speculative benefits of Bitcoin with the solid, albeit slower-growing, prospects of QuantaFlo. Looking at Semler’s earnings history below, we can see that the company doesn’t have a steady growth trajectory. Semler Scientific Earnings History (Seeking Alpha) The Street expects Semler to pull in around $55.50M for 2024, which would be 9.22x forward price-to-sales. The industry’s average price-to-sales is about 4x-5x, so if the Bitcoin market goes sour, we could see SMLR’s share price cut in half. What is more, we don’t have a clear growth trajectory or projections for Semler, so it is hard to gauge where the floor would be both for the company’s potential valuation, and share price. Considering these risks, I am maintaining my conviction level at 3 out of 5 , and the ticker will remain in the Compounding Healthcare “Bio Boom” speculative portfolio. My Plan As I mentioned in my introduction, I was more than happy to book some profits on SMLR as the share price climbed above my Sell Target 1 ($52.23 per share) following the Bitcoin headlines, and the market cap became completely disconnected from the valuation of their core business. Now, I must reevaluate my SMLR strategy as the share price continues to test my Sell Target 2 ($74.20). SMLR Daily Chart (Trendspider) My Buy Levels and Sell Targets were formulated before the company’s Bitcoin endeavors, so will eventually have to reformulate my targets. However, I am still sticking with my Sell Targets until SMLR’s technical condition stabilizes, and I get a better idea of how the market is valuing SMLR’s core business vs. the value of their Bitcoin. That being said, I am more than comfortable adjusting my Buy Levels. Using some technical analysis, and some rudimentary valuations. I have increased my Buy Threshold to $45 per share, up from $33 per share, which is the most I am willing to pay for SMLR. In addition, I have set my Buy Level 1 to $33 per share, and my Buy Level 2 to $23.25 per share, which are key levels where I intend to increase my sizing and Buy frequency. To recap, I am not looking to change my Sell Targets; however, I am adjusting my Buy Levels. This way, I am taking advantage of the increase in volatility, but still looking to book profits and move my SMLR position closer to a “House Money” status to hold for a long-term investment paid for by the market.

Source: Seeking Alpha