Eargo is in some major legal trouble. The stock is down nearly 70% in the last month alone.

Still sentiment is likely outstripping the actual value of the company. Eargo is the target of a U.S. Department of Justice investigation regarding insurance payments. Before disclosing the federal investigation, Eargo told investors about a claims audit by an insurer that's also the company's largest customer. Clearly there are leadership and management issues.

Suddenly the market cap of the company is only $250 million. Implied volatility and option calls suggest the stock could rebound in a significant way.

The problem is we don't know if Eargo's data is true. Eargo reported net revenue that rose 44% year over year to $23 million in the second quarter, but a recent SEC disclosure has investors questioning the integrity of the company's sales figures. This was a $75 dollar stock and it's now approaching $6.00.

For buy the dip investors, this might be too attractive a value opportunity if sentiment continues to crash. The problem is penny stocks are in a Bear market and this is rapidly becoming a penny stock under pressure.

When you look at the Financials profits have been growing at a steady pace. They produce earing aids with sales of $85 million, that's helping a lot of people. We'll have to wait for earnings to know if it's still a good value play, my gut tends to think it is and I'll be looking to get some exposure if it keeps dropping. However the current bear market (for micro cap sector) complicates it's recovery and even that would only be very temporary.

The investigation is related to insurance reimbursement claims the company submitted on behalf of customers covered by federal health plans. Eargo markets tiny rechargeable hearing aids that cost nearly $3,000 per pair. 

In August, Eargo increased its revenue forecast for 2021 to a range between $93 million and $96 million. In light of the investigation, though, the company withdrew its financial guidance for the year. We don't really know how serious the company's legal challenges will be but in theory it could bankrupt the company.

  • Buy rating for $5.50 for a short term play.

While it's very high risk, I'm not sure losing more than half the value of the company over just a few weeks is justified. Their profit margins are relatively high.

Without a way to be sure sales to insurers can remain on the company's income statement, investment banks including J.P. Morgan and Wells Fargo severely lowered their ratings on the medical device start-up. So for risk-adverse investors this is certainly a stay clear.

The further the stock drops, the more this becomes a legitimate value play and not some weird speculation. With the lack of clarity, earnings could be tough. Still it's hard to find a medical company of this caliber so much under $10. The chart is king, what does it say?

Founded in 2010, Eargo is an American hearing aid manufacturer based in San Jose, California. The company's hearing aids were inspired in their design by a fishing fly. Each unit is also rechargeable. The stock's previous baseline was about $30. So the hair cut has been significant and it likely isn't over yet.

It's hard to guess how much of an impact the DOJ investigation will have without more details. We do know the company's largest third-party payor initiated a claims audit earlier this year. This is a terrible market where catching falling knives could be costly, however I suggest you continue due diligence and keep a watchful eye on this one. To think that a $70 stock is now a penny stocks and worth less than one tenth of its previous value is a bid sad.

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