The share price of ASX penny stock Mach7 Technologies Ltd (ASX: M7T) has plunged more than 30% in the past year.
Shares of the ASX health tech company closed on Friday at a new 52-week low of just 53 cents apiece. Long-term investors will be especially disappointed with the stock's continued poor performance. As recently as 2021, their shares were selling for over $1.50 a pop.
The market clearly wasn't impressed by the company's most recent financial results released last Wednesday. The company reported a net loss of $8 million for the year, and the Mach7 share price has dropped 12% since then.
But, if you take a closer look at the numbers, there are some hints that Mach7's new subscription-based business strategy could finally be starting to pay off.
If I'm right, Mach7 could soon be due for a rebound – which means its shares might be going for a bargain right now.
What does Mach7 do?
Mach7 develops medical imaging technology solutions for hospitals and other medical institutions, including universities and research facilities.
Its software integrates imaging data from different sources, providing doctors and other medical professionals with a central platform to view patient data. It connects different databases, standardises different data formats, and even helps healthcare providers interpret images to make diagnostic decisions.
The goal is to give doctors quick and easy access to the information they need to improve patient outcomes.
What's caused the drop in the Mach7 share price?
Over the past few years, Mach7 has been increasingly transitioning to a subscription-based business model.
Under this model, the revenue Mach7 earns per contract is actually higher, but it is delivered over the lifetime of the contract rather than upfront. This means that, as the company transitions, year-on-year revenues are likely to fall — at least until it starts making enough revenue from new subscriptions to offset the loss of upfront fees.
This was borne out in the company's most recent financial results. FY24 revenues were down 3% versus FY23, while the company's net loss increased a whopping 660% to almost $8 million.
But the interesting thing is that although its revenues were lower, Mach7 actually took in record numbers of new sales orders. It's just that 83% of them were subscription-based, versus 58% in FY23.
Mach7 points to these stats as evidence that its strategy is succeeding. However, many shareholders frustrated with the company's short-term financial performance are jumping ship, forcing the share price lower.
Why could Mach7 shares be a bargain right now?
The recurring revenues generated by a subscription-based model provide Mach7 – and its shareholders – with greater confidence about the company's future earnings. But, as we've explained, transitioning to this model can mean a hit to short-term revenues.
The good thing for Mach7 is that it seems to be nearing the end of its transition period. Just 6% of orders came from capital software sales in FY23, and recurring revenues increased 29% year-on-year to $21 million (out of total revenues of $29 million).
The company's outlook for FY25 is getting much rosier. It is targeting revenue growth of between 15% and 25%, which would be a significant turnaround versus this year's performance.
Delivering on these targets could restore investors' faith in the management over at Mach7 and quickly drive up its share price.
As with any penny stock, the risks from investing in Mach7 are high – but they might be worth it for growth-oriented investors.
