Is Nano-X the Ultimate Contrarian Buy?

It was only August when Nano-X Imaging (NASDAQ:NNOX) went public. But in a short amount of time, the company has earned a lot of investor attention — for both good and bad reasons. Not only is its share price up around 70% since it began trading (the S&P 500 is up about 2% over the same period), but there’s been plenty of controversy surrounding Nano-X’s business. Multiple short seller reports have cast doubt on the company’s business model, and investors have bene left wondering if now is the time to sell their shares and walk away.

Let’s balance the available information in order to determine whether Nano-X is heading for a big crash or if it is the next great contrarian investment.

Doctor holding an x-ray.

Image source: Getty Images.

What does Nano-X do?

Let’s start with the basics of Nano-X’s business. Nano-X is an X-ray company that claims its technology can generate the same results as other X-rays, but at a lower cost. Nano-X spent eight years developing a novel X-ray source that it believes can replace the existing micro-mechanical sources used in most imaging systems today. The Israel-based company is still pre-revenue and recorded no sales during the first six months of 2020. Its net loss of $13.8 million through the first two quarters of the year is more than eight times the $1.7 million it incurred during the same period last year, because the company has been spending more on administrative expenses and research and development (R&D).

The controversy short seller

Not everyone is convinced of the company’s magical new product. Citron Research released a report on Sept. 15 in which it gave Nano-X’s stock a price target of $0. The crux of its argument is that Nano-X hasn’t proven its technology or shown what it looks like, nor is there a scientific paper that backs up the company’s claims on the superiority of its X-ray machines. Citron also points out the company’s inability to secure approval from the U.S. Food and Drug Administration (FDA) for its 510(K) application, which would confirm that the X-ray devices are safe and effective. With a high approval rate — typically around 85% — for those types of applications, Citron uses this as another reason to doubt the company’s technology.

Another short seller, Muddy Waters, referred to the company as a “piece of garbage.” It also suggested that it “has no real product to sell other than its stock,” pointing to the fact that Nano-X’s device is not yet commercialized, and the fact that none of the unnamed radiologists that Muddy Waters interviewed would vouch for the company’s claims.

The problem with short seller reports

It can be dangerous for investors to rely on short seller reports, because they’re often inherently biased. The companies or individuals preparing those reports can stand to benefit greatly if the stock falls in price, since, after all, they’re short sellers. The terms of use and disclaimer on Muddy Waters’ page discussing Nano-X were more than four times the length of its actual analysis of the company. There were 1,600 words in disclosures compared to fewer than 400 words explaining why the stock is “garbage.”

Citron’s research involved more analysis, but it also relied on a lack of evidence to justify its position. It also pointed to the fact that Nano-X’s R&D capabilities can’t compare to an industry giant like General Electric. Following that line of thinking, few people would ever want to invest in the next tech start-up, since it couldn’t possibly compete with an Amazon or an Apple in terms of resources. Citron’s report also claims that Nano-X has 21 employees in its entire company. However, on Nano-X’s prospectus, it stated that as of Jun. 30 it employed 27 people — 21 in Israel and six in Japan.

Nano-X also stated in its prospectus that it is conducting additional testing, which will be submitted to the FDA to support its 510(K) application. While the application has a high success rate, there are still no guarantees of approval.

Investors should have a healthy dose of skepticism when it comes to short sellers. After all, if you took Citron’s advice a few years ago and shorted tech giant Shopify (NYSE:SHOP), you would be living with some weighty regrets. The company, which Andrew Left of Citron called nothing more than a “get-rich-quick scheme” in 2017, has skyrocketed more than 1,000% in three years. Today, the Ontario-based business is the most valuable company on the Toronto Stock Exchange (TSE).

Should you invest in Nano-X?

Earlier this month, Nano-X CEO Ran Poliakine said that the company will have a live demonstration of its technology to disprove the allegations of short sellers. Investors will want to circle late Nov. 29 through to Dec. 5 on their calendars, as the company plans to make the demonstration at the Radiological Society of North America conference, which takes place in Chicago during those dates.

Prior to the CEO’s announcement, Nano-X’s stock plunged nearly 50% following the release of the report from Citron. (The S&P 500 was relatively flat over that timeframe.) Since then, however, the healthcare stock has recovered from most of those losses, rising by more than 50%.

Investors need to be extremely careful when it comes to two concerns: Short sellers and companies that aren’t generating revenue. Nano-X is a risky buy even if its technology does exist, because it’s still in its very early growth stages. The best way to prove there’s demand for a product and that it will sell, is through, well, sales. And Nano-X isn’t there yet. If Nano-X is the real deal and its technology impresses the industry the way the company believes it will, its shares should take off. That’s why it could be the ultimate contrarian investment of today.

However, this investment is probably not suitable for most people. The safest approach is to wait until Nano-X conducts its demonstration and to see what industry experts say about the technology, as that can help paint a much clearer picture of the company’s future.

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