Tempus AI Falls 15% on Weak Q4 but EBITDA View Strong: Buy the Dip?

Tempus AI TEM, an innovator in artificial intelligence-based healthcare solutions, has been attracting investors' interest since its successful IPO in June 2024.  The stock had been on a strong upward trend but its weaker-than-anticipated fourth-quarter 2024 results, released on Feb. 24, resulted in a sharp decline, with shares dropping more than 15% the next day. Concerns over revenue timing shifts and market conditions resulted in the downturn.Nevertheless, with an increased 2025 revenue forecast of $1.24 billion and expectations of positive adjusted EBITDA, Tempus AI still remains positioned for long-term growth.Year to date, the stock has rallied 75%, outperforming the 21.6% rise of the Medical Info Systems industry and the Medical sector’s 6.4% increase. In the meantime, the benchmark S&P 500 edged up 1.5%.  The company has also outperformed other players in the health infotech field, like iRhythm Technologies IRTC and SOPHiA GENETICS SOPH, which improved 26.3% and 21.8%, respectively, during the said period.YTD Price ComparisonImage Source: Zacks Investment ResearchKey Q4 and 2024 TakeawaysIn the fourth quarter of 2024, Tempus AI posted 35.8% year-over-year revenue growth driven by strong 30.6% year-over-year sales growth in Genomics with unit growth of 22.5%. Data and services too registered 44.6% year-over-year growth.The company ended the year with $940 million in total remaining contract value and an impressive 140% net revenue retention, highlighting strong customer engagement. For the full year, the Data and Services division was a key contributor.The acquisition of Ambry Genetics, finalized in February 2025, further strengthens Tempus’ genomics capabilities by adding a West Coast lab and expanding inherited risk testing.Another significant move is the five-year extension of Tempus' partnership with Google, which secures favorable cloud computing costs and technological support. Given the heavy computational demands of Tempus’ AI-driven solutions, maintaining a cost-efficient and scalable cloud infrastructure is crucial for sustaining margins and ensuring future product innovation.Among other recent milestones, Tempus achieved an important regulatory milestone with the FDA approval of xT CDx, an NGS-based in vitro diagnostic device, which also received Advanced Diagnostic Laboratory Test (ADLT) status and a reimbursement rate of $4,500 per test.Another notable regulatory achievement was the CMS reimbursement approval for cardiac dysfunction assessments using the Tempus ECG-AF algorithm, with a reimbursement rate of $138 per algorithm. This approval validates Tempus' AI-powered ECG technology, potentially paving the way for broader applications in cardiovascular diagnostics.TEM also signed agreements for in-network provider status with Blue Cross Blue Shield of Illinois, Blue Shield of California and Avalon Healthcare Solutions.In this period, the company expanded its network and is now connected to nearly 3,000 providers in the United States.Bright Fiscal 2025 OutlookTempus AI has provided an optimistic fiscal 2025 outlook, forecasting $1.24 billion in full-year revenues for the combined Tempus and Ambry Genetics business. This indicates 79% year-over-year revenue growth, signaling aggressive expansion, driven by organic growth, the recent Ambry Genetics acquisition and increasing adoption of Tempus’ AI-powered genomic and data solutions.The company also expects to generate $5 million in adjusted EBITDA in 2025, marking a $110 million improvement compared to 2024. A shift from negative to positive adjusted EBITDA is itself a significant breakthrough for TEM, indicating improving operational efficiency, stronger cost controls and positive cash flow.Improving EBITDA TrackTempus AI delivered adjusted EBITDA of -$7.8 million in the fourth quarter, which reflected an improvement of $27.3 million on a year-over-year basis and also a significant improvement quarter over quarter. The entire business is growing at a rate of more than 25%, which is meaningful in generating significant EBITDA going forward.The company’s latest expectation to generate positive EBITDA in 2025 is itself a significant breakthrough for TEM, indicating improving operational efficiency, stronger cost controls and positive cash flow.Cash Flow TrendThe company’s cumulative operating cash outflow was $189 million at the end of the fourth quarter of 2024, an improvement from $214.3 million of outflow a year ago. According to the company, the business is synergistic across all its products, from Genomic sequencing to Data business and AI Applications business. This accelerates the company’s path to positive cash flow.TEM's Earnings Estimate Revision TrendImage Source: Zacks Investment ResearchIn a month, the company’s full-year estimate has been revised upward from a loss of 68 cents per share to a loss of 47 cents per share.The SnagsEarnings Shortfall: The company reported an adjusted net loss of 18 cents per share in the fourth quarter, lagging the Zacks Consensus Estimate by 20%.Revenue Miss: Despite a 36% year-over-year revenue increase, the figure fell short of our projection by 2.7%.Rising Operating Expenses: Non-GAAP operating expenses grew 6.5% to $142.5 million due to salesforce expansion and increased technology and R&D staffing.Conservative EBITDA Outlook: The full-year adjusted EBITDA projection of $5 million was below the anticipated nearly $6 million, suggesting potential profitability challenges.TEM Stock ExpensiveTEM’s stock is currently slightly overvalued compared to its industry, as shown in the chart below.TEM is currently trading at a forward 12-month price-to-sales (P/S) ratio of 9.9, a premium to the broader industry's average of 6.17X. Even the stock is trading higher than other industry players like IRTC (5.13X) and SOPH (3.15X).It is also above its six-month median of 9.02X, implying investors might be overly confident about the stock’s future revenue growth.Image Source: Zacks Investment ResearchOur TakeWith the AI market projected to grow exponentially in the coming years, Tempus AI is well-poised to capitalize on expanding opportunities. With a strong financial outlook and efforts to improve healthcare outcomes, TEM presents a unique opportunity for investors seeking high returns from the AI and healthcare sectors.Yet, despite the company’s several long-term upsides, the lower-than-expected fourth-quarter performance was a disappointment. Its expensive valuation is limiting this Zacks Rank #3 (Hold) stock’s near-term gains. While current shareholders should hold their positions, new investors should wait for the stock to retract some of its recent gains, providing a better entry point. 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Click to get this free report iRhythm Technologies (IRTC): Free Stock Analysis Report SOPHiA GENETICS SA (SOPH): Free Stock Analysis Report Tempus AI, Inc. (TEM): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks