Tempus AI, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Tempus AI, Inc. is a healthcare technology company focused on precision medicine by analyzing molecular and clinical data through AI and machine learning, offering solutions for oncology, mental health, and other health-related conditions, serving physicians and healthcare systems.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Core Offering: Tempus aims to revolutionize healthcare using artificial intelligence to analyze extensive genomic and clinical data. Their core business lies in creating a platform that enables:
    • Precision diagnostics: Providing insights into disease biology to help physicians with personalized treatment.
    • Drug discovery: Aiding pharmaceutical companies to identify novel drug targets, develop therapies more efficiently, and guide clinical trials using AI.
    • Clinical data analysis: Creating standardized and structured datasets from unstructured data.
  • Revenue Streams: The company generates revenue primarily from two segments:
    • Data & Services: Revenue derived from providing healthcare providers with access to the platform, databases and its interpretation services for use by physicians and researchers, and AI-enabled analysis services.
    • Genomics: Primarily revenue is obtained from selling assays, or tests, to pharmaceutical partners to support clinical trials, and other research in their pipeline.
  • Target Customers: The main customers include academic medical centers, hospital networks, large pharmaceutical companies, and biotechnology and health technology companies.

Industry Trends & Competitive Landscape:

  • Industry Dynamics: The healthcare industry is undergoing massive transformation with the increased adoption of artificial intelligence, machine learning, and genomic sequencing. Rising healthcare costs and the need for more targeted, effective treatments are accelerating the adoption of precision medicine technologies. These new technologies require a lot of data, which makes companies with extensive data sets valuable.
  • Competitive Landscape: The healthcare data analytics space is rapidly evolving with new and existing companies entering the market. Competitors include companies that focus on AI-enabled drug discovery, genomic sequencing, and clinical data analysis. Key rivals are companies like Paige AI, Sophia Genetics, Flatiron Health and Guardant Health. The industry has some barriers to entry, but there are also lots of new players constantly trying to gain share. To compete, you need to have an extensive data set, access to patients, great AI and ML algorithms, a proven method of collecting patient data, a regulatory approval and be able to reach consumers, and a great brand. It is very difficult for a single company to do all that at a high level.

What Makes Tempus Different:

  • Data-Driven Approach: Tempus has established one of the largest libraries of clinical and molecular data through partnerships with healthcare systems and academic centers, differentiating itself from competitors relying solely on technology or databases not integrated into clinical care, leading to superior data sets.
  • AI-Powered Platform: They use advanced AI techniques to analyze patient data which are integrated with clinical results and data and used by physicians and researchers to assist in clinical trials and drug development.
  • Integration of Clinical and Molecular Data: Their platform combines clinical data, molecular data, and treatment data to allow for more comprehensive analysis and discovery of potential targets.
  • Full Stack Business: They both generate the data, and use that data to generate value. This also helps build better AI models.
  • Focus on AI: The company has been focusing on building out a platform that incorporates AI and Machine Learning to generate insights on its data.
  • Strong partnerships: The company has been able to forge strategic collaborations with prominent healthcare institutions and pharmaceutical firms, allowing them to be used in both clinical care and drug development, further strengthening its moat.
  • Scale: Tempus has been trying to build scale in its platform, and grow in size, which gives it leverage with more clients and data.

Legitimate Risks to the Moat:

  • Technology Disruption: Rapid advancements in AI, machine learning, and sequencing could erode Tempus’s technological edge. If new technologies emerge that make Tempus’s algorithms obsolete, it will lose its technological advantage and its moat will narrow. A more nimble competitor that has a more effective software, or more cutting-edge AI could severely challenge the company.
  • Competition: The healthcare data and AI market is competitive, so a strong competitor with better economics might eat into its profits and market share.
  • Data Security and Privacy Concerns: Data breaches and privacy violations could erode trust in the company and hinder future partnerships. The company must ensure that their security protocols are up to date, and that patient data is safe, as any breach would damage its credibility and moat. The penalties for not protecting such information could lead to lost revenues.
  • Regulatory Challenges: Stringent regulatory policies and slow approval processes could hamper the company’s operational efficiency. Regulations may be put in place that limit the scope of the company’s AI application, or increase the costs, making the company less attractive to investors and customers. If government regulations change, then their value could change.
  • Integration Complexity: Difficulty integrating the company’s system into existing healthcare systems could lead to slower adoption.
  • Reimbursement Challenges: Failure to receive adequate reimbursement from government or insurance plans may severely reduce profitability. This may affect the revenue that can be gained by offering services, as it can impact the cost at which customers are able to pay for them.
  • Sales Execution: They have to be able to execute sales and sell to customers. A lot of startups have good technology, but are never able to effectively market and sell that technology. They will need to show investors that they can become a profitable enterprise.
  • Ability to retain partners: A lot of the value that Tempus brings comes from data which they get from partnerships. If they lose key partners, their data sets and AI models may be affected. The same holds true for client acquisition: If the company can’t sell its products to clients, they will have a low moat.
  • Customer Concentration: Given that the company deals with a relatively small number of large corporations, there are risks involved with customer concentration, should they not renew contracts with the company.

Financial Analysis

  • Revenue Growth: In recent periods, company has exhibited high revenue growth rates. In the three months ended September 30, 2023 they generated $119 Million in revenues, a 22% growth year over year. And for 9 months of 2023 they had $311 Million in revenues. However, this is from a smaller base, so it is important to note that as the company increases, its revenue growth may decline, as is with most companies.
  • Margins: The company’s gross margin was 49% for the three months ended September 30, 2023, meaning that it makes roughly half the sale price on every sale. High gross margins are good for a company. It should try to keep those margins high, and increase them over time. If margins fall, then its competitors have gained an advantage.
  • Profitability: The company had a net loss of $172 Million for the nine months ending 2023. The company is still not profitable, and it will need to achieve profitability in order to become self-sustaining, which means it is high risk.
  • Capital Structure: As a newer company it is more reliant on equity funding, than on debt. In the most recent quarter, they generated a significant amount of cash through financing activities.
  • Cash Flow: Cash from operations have been negative but improving in recent years. And the company has been using cash to make acquisitions, which in turn are not creating immediate positive returns. The company needs to improve its operations in order to generate profits.
  • Cash Position: The company has around $741 Million in cash, which gives it some runway to achieve profitability.

Understandability Rating: 3 / 5

While the fundamental concept of precision medicine powered by AI is not particularly difficult, the complexity of integrating and managing vast and diverse data sets, combined with technical nature of their products and operations, makes Tempus’s business moderately complex to understand. The business is less straightforward than a consumer product brand, or a bank, or some basic software companies, so a higher rating is warranted. It is also difficult to understand all the different product pipelines. It is definitely not a simple business to understand from the perspective of an average person, so a 3 is warranted.

Balance Sheet Health Rating: 4 / 5

Tempus has a moderately healthy balance sheet, with a substantial cash position, but is not profitable yet. It has a lot of debt, but is still not at levels that are concerning. Overall their financial position is moderately healthy, and warrants a higher rating, due to a strong cash position.

Recent Concerns & Controversies

  • Competition: The company mentions several times of the intense competition it faces, including from smaller players, and larger players with better data assets or AI models. Competition may severely limit the long term growth potential for the company.
  • Uncertainties around FDA approvals: Some of its programs are based on drugs or clinical diagnostic tests that have not yet been approved by the FDA. Delays in approvals could mean lower revenues.
  • High operating losses: Although the company is showing rapid growth, it is still not profitable and will need to achieve it in the next few years.
  • Stock volatility: The company’s shares can react strongly to earnings reports and new developments, so this implies a volatile business.

Final Remarks

Tempus is a company that is trying to solve a very hard problem and it needs significant investment for it to work. If their technology succeeds, they will create a huge moat, but there are a lot of risks that they must go through to get to profitability. As it stands today, it is an interesting company, that definitely warrants an investment from an aggressive investor. However, it may not be suited for the defensive investor. It is important to keep the risks in mind when investing in this company.