This Low-Price Stock Is Ready to Come Out of Its Shell
Here's how to trade this small-cap name, which aims to do for its market what digital photography did to film cameras.
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A few weeks ago, I mentioned that I was contemplating taking an initial position in Butterfly Network (BFLY). I have now done so via covered call orders.
This small-cap name has good liquidity in the options against the stock and option premiums are quite lucrative. The equity is our latest trading idea.
This portable ultrasound device concern provides handheld, single-probe, full-body ultrasound devices that have a novel approach in this space. They utilize semiconductors as opposed to lead-based piezoelectric crystals, which have been the standard for the last 60 years. They also offer a much lower price point (~$10,000) than fixed or cart-based ultrasound solutions.
Butterfly’s devices can be plugged into a smartphone or a laptop for image viewing. The company has distributed over 150,000 devices worldwide since its inception.
This technology is poised to surpass the quality of lead-based piezoelectric crystals by the end of 2026 when a new chipset hits the market. The piezoelectric ultrasound market is an approximate $10 billion global market and Butterfly is aiming to do to this market what digital photography did to film cameras.
Butterfly’s vision is to transform medical imaging into an easier and more affordable process. The company offers two whole-body and two application-specific probes. It also provides attendant cloud-connected software and services. Its products are available in over a hundred countries.
Despite the promise of the company’s technology, the stock has destroyed a great deal of shareholder value since Butterfly went public in mid-2020. Poor execution has been one part of this disappointment. To enable a turnaround, the company recently brought in a new CFO and CTO.
Butterfly is also moving toward offering more higher-margin software and focusing on recurring revenue streams. Towards that end, company has signed 27 partnership deals to place AI into its software development kits. Under the banner of Butterfly Garden, any of its partners can develop an AI app (e.g., for enhanced heart imaging) that healthcare providers can download from an app store. It then automatically integrates into Butterfly’s software to meaningfully enhance quality of care.
Butterfly’s balance sheet is in good shape and cash burn is significantly being reduced. A board member purchased over $4.5 million worth of shares in early December, which is a big vote of confidence, in my view.
In coming quarters, Butterfly should be able to leverage its semiconductor technology to drive higher adoption and higher profitability from non-product revenue. This should boost overall sales growth and margins in the years ahead.
Given these developments, I am willing to take a small stake in this potential turnaround story. I am using a covered call strategy to either lower my initial entry point significantly or pick up a more than solid return
Option Strategy
This is how one can initiate a holding in BFLY with a covered call order. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the July $3 call strikes, fashion a covered call order with a net debit in the $2.10 to $2.20 a share range (net stock price - option premium).
This strategy provides downside protection in the high 20%'s percentage wise and upside potential of nearly 40% over the option duration.
At the time of publication, Jensen was long BFLY.
