Tempus AI Hits $100—Are Shares Due for a Pullback?
Tempus AI (NASDAQ: TEM) has been publicly traded for only 16 months, and it has been nothing short of a market standout over that time. Compared to its IPO price of $37, Tempus shares were up by a whopping 155% on Monday, Oct. 13. The stock eclipsed $100 for the first time ever on Oct. 8 and reached as high as $104 on Oct. 9. However, it has come back to Earth a bit, closing near $94 on Oct. 13.
Below, we’ll dive into the recent developments that have been driving Tempus AI’s share price. However, more importantly, we’ll analyze what the future may hold for this stock. Is Tempus AI’s rally overdone, or does the evidence suggest shares will keep climbing higher?
Device Clearances and Trump’s AI Cancer Order Send Tempus Flying
Driving much of the recent gains in this healthcare stock are several key events. First, Tempus announced on Sept. 11 that it received 510(k) clearance from the Food and Drug Administration (FDA) for its updated Tempus Pixel medical device. Pixel is an artificial intelligence (AI)-powered cardiac imaging platform. Unlike similar platforms, Pixel provides numerical data about the health of different heart tissues. Tempus argues that this can help detect issues that doctors may not be able to see by simply looking at a scan. It also creates automated image reports, helping reduce the time doctors need to spend doing this manually. Tempus shares jumped by nearly 14% on this news.
The company also gained 510(k) clearance for its Tempus xR IVD device on Sept. 22. This test analyzes cancerous cells through RNA sequencing. Tempus hopes to sell the test to companies developing cancer drugs, helping them design better trials. RNA analysis can provide unique insight into how cancer behaves in a specific patient. Thus, the test can potentially help drug companies better identify which patients are appropriate for their clinical trials. By selecting patients who may react best to a treatment, the chances of a drug gaining approval could increase. Tempus shares initially spiked on this news, but closed down.
Lastly, on Sept. 30, President Trump signed an executive order that likely helped Tempus shares rise by 9% that day. Trump called on federal agencies to develop programs and increase investment in using AI to fight pediatric cancer. This clearly aligns with Tempus’s mission and opened the door to generating business from the government. Notably, on Oct. 9, Tempus said it was working with a U.S. government agency to support cancer research. However, shares closed down on this news.
Consensus Projects +20% Downside in TEM; Recent Targets Provide Some Solace
The MarketBeat-tracked consensus price target on Tempus is just under $72. This implies that shares could be in store for a large correction, with the potential to fall by 24%. However, recently updated targets are significantly more encouraging. HC Wainwright lifted its forecast on Tempus from $90 to $98 on Sept. 12. Meanwhile, Guggenheim boosted its Tempus price target from $80 to $95 on Sept. 26. Overall, these targets imply between 0% and 4% upside in shares.
That’s certainly nothing to write home about. However, the silver lining is that these targets provide some justification for the rally that Tempus has already seen. This lends credence to the idea that Tempus shares are reasonably valued, considering recent positive developments.
Multiple Factors Point to Tempus Being Overbought
Tempus trades at a forward enterprise value to sales (EV/S) ratio of around 12x. That is well above the approximately 6x average forward EV/S ratio of U.S. large-cap life sciences tools and services stocks.
Trump's announcement feels like a clear positive for Tempus. However, without a deep understanding of the markets for its newly cleared devices, it's hard to say how much they will move the needle. Importantly, gaining 510(k) clearance means that the safety and efficacy of a device are “substantially equivalent” to devices currently on the market. It does not mean that the device is a better or unique solution. Knowing this somewhat tempers the impact of these clearances. Tempus still needs to prove that these products will gain adoption and generate meaningful financial results.
This valuation data, and the lackluster Wall Street forecasts on Tempus, indicate an overextension of its rally. In the long term, Tempus shares still have a strong chance of performing well, given the company’s small revenues in relation to pharma R&D spending. Still, investors should consider exercising caution around this stock at current prices.
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