(TEM), (ILMN)
Last weekend, my daughter, the computer science whiz studying at UC, called me with a question about healthcare AI companies for her investment project.
"Dad, my professor says these healthcare AI stocks are just cash incinerators with no path to profitability," she explained. "Should I avoid the whole sector?"
I was cutting vegetables for dinner as we talked – my homemade pasta sauce is legendary in three counties. I set down the knife and gave her my perspective, which I'll share with you now.
Back in the early '90s, when I was covering Asian markets for The Economist, I encountered countless biotech companies making grand promises about revolutionizing healthcare.
The pattern was always the same – ambitious visions, heavy cash burn, and perpetually delayed profitability. Few survived.
So when a healthcare AI company crosses my radar these days, my first instinct is skepticism, honed by decades of watching promising technologies evaporate along with investors' capital.
But Tempus AI (TEM) has me breaking my own rules.
You see, there's a moment in every significant technological shift when the numbers start telling a different story than the narrative.
TEM's financials have significantly improved, with positive cash flow expected by year-end and Q4FY24 delivering record revenues.
The Data & Services segment – where the real money is – grew by a stunning 44.6% YoY.
FY24 revenues hit an all-time high of $693.4 million, bolstered by deals with Boehringer Ingelheim and Illumina (ILMN).
Management is now guiding for $1.24 billion in 2025 revenues – a 79% YoY growth. This isn't idle talk – these are numbers that give hardened skeptics like me reason to take notice.
The first question I ask about any AI company is whether they actually have the data to do what they claim.
Tempus AI has amassed over 240 petabytes of healthcare data – an information advantage that reminds me of trading Japanese equities in the 80s when having access to real company data was worth its weight in yen.
In Q4FY24, Tempus released Olivia, their AI-enabled personal health app.
Unlike other health apps that fragment patient information, Olivia consolidates data from multiple providers into a single interface. It gives patients access to their complete health records and delivers AI-powered insights about their conditions.
Having watched numerous healthcare startups flame out during my reporting days, I can tell you this approach solves a genuine problem that most tech companies miss.
For FY24, revenues grew by 30% compared to 77% in FY23.
Don't be fooled by the apparent slowdown – TEM is working from a much larger base, with higher-margin services taking center stage.
The company holds $448 million in cash and short-term investments with a quarterly burn rate of $39 million, giving them a runway of nearly three years.
The Ambry Genetics acquisition is a game-changer for TEM, adding genetic testing capabilities and a cool $300 million in revenue.
Back when I was tramping through biotech labs in Asia for The Economist, I learned a critical lesson - the bottleneck in genetic medicine isn't sequencing but interpretation. TEM knows this and is planting its flag exactly where the gold is.
When Q4 revenues came in a hair below Wall Street's guesses, the stock took a hit. I've seen this movie before.
The algorithms panic, creating beautiful entry points for those of us with enough battle scars to know better.
The CEO barely contained his satisfaction: "Our Data and Services business just had a really strong Q4, finishing a really strong year."
Translation: "We're killing it but I'm not going to brag."
Sure, TEM has rivals. PathAI, Prognos Health, and Healwell AI are all scrambling for a piece of this pie.
But none has TEM's data treasure chest, and none has figured out how to monetize in three directions at once - genomic testing, data licensing, and consumer apps.
The market size is staggering - somewhere between $317 billion and $490 billion by 2032. That's bigger than the GDP of most countries I've reported from.
And here's the kicker with AI companies - the rich get richer. More data attracts more customers, generating even more data. Once you're ahead, staying ahead gets easier.
For those who care about valuation (and you should), I'm looking at 2026 projected revenues of $1,612 million with a P/S multiple of 6.57. That math gives me significant upside from today's price of around $49.87.
Is that multiple too rich? Not when you're dealing with a company that's cracked the code on healthcare AI profitability.
Are there risks? Of course. Profitability might take longer than expected.
The data moat could theoretically be bridged by a determined competitor with deep pockets. The field is getting crowded.
But I’ve witnessed enough market transformations to recognize when a company sits at the perfect intersection of powerful trends. And right now, TEM is riding three unstoppable waves—AI, precision medicine, and healthcare’s digital overhaul.
The recent market jitters have created a textbook buying opportunity. When Wall Street's short-term anxiety gives you a chance to buy long-term winners at a discount, you take it.
TEM has multiple ways to win, and that's the kind of bet I've made my career on.
With that, I had to end our call before my sauce burned. Yesterday, she texted me that she'd bought TEM on the pullback.
After decades navigating markets from Tokyo to Wall Street, there's nothing quite like seeing the next generation apply those lessons – sometimes even better than their teacher.
The student becomes the master, as they say.
