Aiforia: We expect the positive news flow to continue

Translation: Original published in Finnish on 10/02/2024 at 7:55 pm EEST

We reiterate our EUR 4.6 target price and raise our recommendation to Accumulate (was  Reduce). Building of Aiforia’s growth continues and a positive news flow is expected from the company, especially on the sales front, but also on regulatory approvals progressing in Europe. The company’s customer gains have brought predictability to growth, although forecasting risks, especially in terms of growth timing and in the long term also concerning the revenue level, remain high. We believe Aiforia has clear preconditions to grow into one of the long-term winners in its market and after the share price drop (-12%), we find the risk/reward ratio attractive even within a year. 

We expect positive news flow to continue, especially in Europe

Since our last update (8/29), Aiforia has announced a collaboration with the Paris Hospital District, which concretizes the early steps of cooperation. The company’s sales pipeline is good and we expect the positive news flow to continue, especially in European tendering. In H1, Aiforia commented that it is participating, e.g., in 15 tendering processes in Italy. The 2026 deadline to use EU's RRF subsidies supports investments in digital pathology in southern Europe. In the US, we believe the clinical market is waiting for changes in FDA approvals. In the US, the need for automation is also evident in the future, so we believe this is more of a timing question for the market. We also expect the company to announce new CE labeling in late 2024/early 2025, which will enable additional sales.

Digital pathology is catching on, although it is difficult to predict how fast the market will develop

Digitizing pathology is at a very early stage, with only 14% of pathology samples being digitized worldwide by 2020. However, the investment wave is ongoing. With an aging population, the need for pathology analysis is growing and there is already a shortage of pathologists, so there are clear demand drivers for solutions that increase efficiency and capacity. The competitive landscape in the young market is still being formed. Given the competitive strengths of Aiforia's product (customizability, cell-level detection, first commercialized predictive AI model) and significant clinical references, we believe the company has clear potential to become one of the long-term winners in the market.

Estimating the timing and slope of revenue growth is difficult, but the direction is clearly upward

Our estimates are practically unchanged. In H1’24, the risks related to the timing of Aiforia’s growth were partly realized, especially in the US. We expect customer gains to be more clearly reflected in revenue in 2025-28, when the product portfolio expands with CE labeling and customers expand the use of Aiforiato a larger share of their pathology laboratory workflows. Then, we expect annual revenue growth to be a very high 60-75% and the EBIT margin to strengthen from a loss-making investment phase to 7% in 2028. We estimate revenue in 2030 to be 57 MEUR (target: >100 MEUR ~2030). Of course, this will require Aiforia to implement a very strong strategy and continue to deliver new customer gains. Now, the most important aspect of the investment story is that Aiforia’sproducts work (competitiveness is upheld), the company wins customers, succeeds in deliveries and can finance its investments.

The risk/reward ratio has improved to attractive also in the short term with the share price drop

Aiforia's valuation (2024-26e EV/S 32-13x) relies on expected strong and scalable growth. By pricing growth at various rates and confidence intervals, we can justify the company's value at a wide range of EUR 1.4-7.8 per share (previously EUR 1.4-7.7). In light of the received evidence, our confidence in the company’s long-term growth is strong. The risk is elevated by the uncertainty of the growth rate, which affects cash development. Customer gains have provided more basis for growth, improved access to financing and lowered forecasting risks. We expect the positive news flow to continue and find the risk/reward ratio attractive also in the short term after the share price drop (-12%).