Investing in ASX small-cap stocks should always come with a side of caution.
Many small-cap companies experience significant volatility because of limited liquidity, narrower customer bases, and greater sensitivity to market sentiment and economic changes.
However when one receives broker estimates of more than 300% upside potential, it's worth taking note.
That's exactly the case for ASX small-cap stock Saluda Medical Inc (ASX: SLD).
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Company overview
Saluda Medical is a commercial-stage medical device company commercialising spinal cord stimulation (SCS) therapy. Saluda is currently a single product company, centred around its differentiated SCS product called the 'Evoke System'.
The company has been commercialising the Evoke System for roughly three years in the US, and approximately five years in Europe and Australia, for the treatment of patients with chronic pain of the trunk and/or limbs.
ASX small-cap healthcare stocks such as Saluda Medical can have high upside because successful clinical results, regulatory approvals, or commercial partnerships can rapidly increase their valuation from a low base.
They are also more volatile because they often rely on future growth expectations, limited funding, and investor sentiment rather than stable earnings.
While the optimism around this small-cap is exciting, its 66% year to date share price decline illustrates this volatility.
Bell Potter optimistic on market share
In the latest report from Bell Potter, the broker said the US spinal cord stimulator market is worth about US$2.3 billion and is growing steadily.
A major industry shift is toward "closed-loop" technology, which automatically adjusts stimulation levels, and Bell Potter believes this is becoming the new standard.
Although competitors already have a closed-loop product, Bell Potter believes Saluda's technology is stronger and helping it grow quickly in the US market.
Saluda's recent growth rates have significantly outpaced the broader industry, leading Bell Potter to view the company as an emerging disruptor and a possible takeover target for larger competitors seeking faster growth.
A natural conclusion is competitors without closed-loop technology risk being left behind, and with the best available offering and little evidence of others developing their own, SLD is emerging as a formidable disruptor.
More than 300% potential upside
Based on this guidance, Bell Potter has retained its speculative buy recommendation and $2.00 price target on this ASX small-cap.
From last week's closing price of 48 cents, this indicates an upside potential of 316%.
SLD is gaining considerable commercial traction, and with >150 US sales reps now on board, there's little reason to expect any slowdown in the quarters ahead.
