Sight Sciences: Recent Stock Price Pullback Is Unwarranted

Elevator Pitch

I have a Buy rating for Sight Sciences, Inc. (NASDAQ:SGHT) shares.

With my initiation article for SGHT published on March 17, 2023, I reviewed Sight Sciences' Q4 2022 financial results and assessed the company's FY 2023 management guidance.

In the current update, I find that there is a mismatch between SGHT's favorable Q1 2023 financial results and its recent stock price weakness. I believe that Sight Sciences' valuation discount relative to its peers should narrow over time, as there are key metrics pointing to a positive outlook for SGHT. As such, I remain bullish on Sight Sciences.

SGHT's Recent Share Price Underperformance Is Unjustified

Sight Sciences' stock price fell by -6.3% on May 5, 2023, the day after SGHT disclosed its financial performance for the first quarter of this year. In the three weeks following the company's Q1 2023 result announcement, SGHT's shares dropped by -13.3%, while the S&P 500 went up by +3.6% in the same time frame.

With the recent pullback in Sight Sciences' share price, SGHT is now valued by the market at 3.2 times consensus forward next twelve months' Enterprise Value-to-Revenue as per S&P Capital IQ's valuation data. In contrast, SGHT's peers, STAAR Surgical Company (STAA) and Glaukos Corporation (GKOS) are currently trading at relatively higher consensus forward next twelve months' Enterprise Value-to-Revenue multiples of 7.4 times and 8.9 times, respectively.

Sight Sciences' actual Q1 2023 bottom line came in above market expectations, and it left its full-year FY 2023 financial guidance unchanged.

Revenue for SGHT expanded by +27% YoY to $18.8 million in the first quarter of the current year, which was largely in line (marginally or -0.4% lower than the consensus top line forecast) with Wall Street's expectations. Sight Sciences' net loss per share narrowed from -$0.49 for Q1 2022 to -$0.35 in Q1 2023, which was better than the analysts' consensus bottom line projection of -$0.41.

Separately, Sight Sciences maintained its FY 2023 sales guidance in the $89-$94 million range and its average quarterly normalized operating cost guidance of $30.5 million in the current year. SGHT's guidance points to a healthy top line growth of +25%-32% and lower operating costs (actual average quarterly operating expenses were higher at $35.7 million in 2022) for fiscal 2023. As a comparison, the sell-side analysts' consensus FY 2023 revenue growth rate forecasts for STAA and GKOS were inferior at +22.2% and +5.5%, respectively.

Taking into account SGHT's Q1 2023 bottom line beat and the company's favorable full-year guidance, Sight Sciences' -13.3% stock price correction in the last three weeks and its significant valuation discount relative to peers don't seem warranted.

Positive Read-Throughs From Key Metrics For Q1 2023

SGHT revealed a number of key metrics as part of the company's Q1 2023 financial results press release and its first quarter results call, which provided positive read-throughs for its business outlook.

Firstly, Sight Sciences' key dry eye product, the TearCare System, which was cleared by FDA at the end of 2021, saw its installed base jump by +87% YoY from 632 as of March 31, 2022 to 1,184 as of end-Q1 2023.

As highlighted in SGHT's May 2023 investor presentation slides, the company's TearCare System is targeting a market that is as large as $10 billion. In comparison, SGHT' Q1 2023 dry eye product segment revenue was just $1.5 million. At the Bank of America (BAC) Securities Health Care Conference on May 10, 2023, Sight Sciences also emphasized that "dry eye is the number one reason that a patient visits an eye care provider, and it's getting worse" thanks to "our obsessions with screens."

In other words, SGHT has been making good progress in capturing a share of the large and growing dry eye disease market.

Secondly, SGHT noted at its Q1 2023 results briefing that its core surgical glaucoma product OMNI is still achieving "customer retention" rates "in the high 90 percentile range." At Sight Sciences' most recent quarterly results call, one of the attendees asked about the "competitive environment" in the surgical glaucoma market. This healthy retention metric for OMNI disclosed by SGHT should put to rest concerns about competition to a large extent.

Thirdly, investors shouldn't be worried about OMNI's potential revenue cannibalization risk. In my March 17, 2023, initiation article for Sight Sciences, I mentioned that "SGHT's new surgical glaucoma product, SION, was only introduced to the market in August 2022."

At its Q1 2023 results call, Sight Sciences disclosed that client accounts with orders for both OMNI and SION rose by +39% YoY in Q1 2023 as compared to its Q1 2022 customer accounts with orders for OMNI alone. Furthermore, OMNI's utilization rate for this group of clients (who placed orders for both OMNI and SION) increased by +16% over the same time period. These metrics imply that the sales cannibalization risk (with SION's launch) for OMNI is not an issue to be overly concerned about.

Concluding Thoughts

My view is that the market hasn't given Sight Sciences, Inc. sufficient credit for its above-expectations Q1 bottom line and its positive 2023 guidance. Sight Sciences' recent share price underperformance is unwarranted, and the stock shouldn't trade at such a wide valuation discount to its peers. This explains why I have retained a Buy rating for Sight Sciences, Inc.

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