Yesterday evening I was listening to this interview of Adu on Semler Scientific $SMLR:

I was glad to stumble on it because it helped clarify some of my discomfort with the business and the stock.

I guess what I’m taking away is the importance of asking the following questions:

  1. How big is the TAM (total addressable market)?

  2. How big is the company relative to its TAM?

  3. How is the TAM growing?

These questions force us to think about opportunities for reinvestment, which is the second most important criteria of an amazing business - the first one being a high return on reinvestment.

To answer the first question, Adu in the clip above considers that the core TAM for Semler is comprised of people enrolled in Medicare Advantage and at risk of PAD. Currently there are 25M people in the Medicare Advantage program, and out of those about 6M are at risk of PAD. Multiply by the cost per test ($40), that gives us an immediate TAM of about $240M.

You could argue that the total addressable market is bigger if you want to include everyone who might be at risk, which is 80M people in the US according to Adu, but I won’t go there.

Semler’s revenues for the trailing twelve months are $53M, so they’re about 20% penetrated in their immediate TAM.

For me, that’s not an interesting investment, and it could explain some of the recent slowdown in growth, which I previously attributed entirely to Covid.

As the company grows into its target market, the incremental user becomes harder and harder to acquire. Furthermore, while the TAM itself is probably growing with the aging population, that growth is probably not spectacular. And finally, I don’t know whether Semler would be able to export their model outside of the US, given how important the relationships with the insurers are and how regulated this industry is overall.

I realized that another stock I had on my watchlist, Smith & Wesson $SWBI, suffered from a similar problem. I don’t know what % of people are potential gun owners in the US, but not only do I think it’s far from 100%, I imagine that it’s also at most one purchase every few years for most people.

When the TAM is limited like this, the company either has to innovateby introducing new products or by going international, neither of which is risk-free.

So in a nutshell, I see the high ROIC for Semler, but I find it harder to feel confident about the opportunities for reinvestment.


Until next time, stay cool & stay invested!