Organovo Investors: Tread Carefully

Organovo (NYSEMKT: ONVO  ) is a tiny company that is starting to capture the imagination of medical professionals and investors alike. Many are enthralled by the company's long-term goal of printing human organs for transplants.  But that doesn't explain the fact that the company's stock is up more than 100% in the past month.

NovoGen Bioprinter. Source: Organovo. 

There's been a perfect storm of three variables that have likely helped Organovo shoot higher. As we'll see, however, investors need to tread carefully, and closely examine their investing thesis.

A possible buyout?
In a lot of ways, Wall Street can be like your average fifth grade classroom. Once a juicy rumor gets started, it's hard to stop its spread or dispute its validity. Such is the case in the realm of 3-D printing.

Last month, Hewlett-Packard (NYSE: HPQ  ) announced that it would be entering the 3-D printing market. Since then, rumors have been swirling that the company could be looking to acquire one of the smaller 3-D printing companies on the market. That has helped push shares of Organovo and its competitors higher.

If the potential for a buyout plays a big role in your investment thesis, however, it's best to stop and take a reality check. While a buyout certainly could be in Organovo's future, the ability to predict it, and the price at which it will happen, is nearly impossible. Like the fifth-grade rumors, you'd be better off focusing on the facts, and not the speculation.

An industry on fire
There's no question that 3-D printing is one of the hottest industries of the past few years. The two largest players, 3D Systems (NYSE: DDD  ) and Stratasys (NASDAQ: SSYS  ) have both seen their market value explode since the beginning of 2012.

DDD Chart

DDD data by YCharts.

Though enthusiasm for this new technology plays a role, both of these companies have also done the hard work of proving that 3-D printing is an industry worth investing in. Take a look at the annualized revenue growth each has accomplished since 2010.

Sources: Yahoo! Finance, E*Trade.

But investing in a company simply because it is in a hot industry can be a recipe for disaster. One need only look back to the dot-com bubble at the turn of the century to see that just because a company is associated with a "hot" trend by no means makes it a solid investment.

Remember, Organovo is currently valued just shy of $1 billion, and yet has produced just $129,000 in revenue over the past six months. The company might have potential, but it is by no means in the league of 3D Systems or Stratasys right now.

Real potential
And yet, despite my bearish warnings, I am actually a shareholder  of Organovo. But the key distinction I'd like to make is that my decision has nothing to do with buyout rumors or the fact that major 3-D printing players are doing well.

Instead, my investment thesis has to do with what Organovo actually does right now. Specifically, I'm excited about the fact that the company has been able to bioprint liver tissues that can mimic native liver behavior for more than one month. No other company has been able to do this, and it represents an enormous value for pharmaceutical companies.

As it stands now, big pharma spends billions on drugs that will eventually be thrown in the trash because of liver toxicities. Until now, those toxicities didn't show up until human trials began. With Organovo's liver assays becoming available in 2014, these toxicities will become detectable much earlier in the approval process, potentially saving drug companies billions of dollars.

Big growth ahead
Obviously, I think Organovo's potential warrants holdings shares even at today's elevated prices, but it's not the only growth play to consider for your portfolio.

This incredible tech stock is growing twice as fast as Google and Facebook, and more than three times as fast as Amazon.com and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!


Read/Post Comments (14) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2013, at 1:43 PM, 1297US12 wrote:

    Why you tak'in a leak on every ones fun???

    You try'in to stress us out????

    Think we don't know what's going on???

    If you can't take the heat stay out of the kitchen.

    Gary O

  • Report this Comment On November 18, 2013, at 2:04 PM, 1297US12 wrote:

    Now HPQ is a different story, they can't seem to do anything right. From selling laptops with bad mother boards, which they wouldn't back, (I had one) to their new tablet which every one took off the shelves. Why would anyone think they could get 3D printing right, unless they buy out a 3D company that knows what their doing.

    There are a lot of good company's to make money from, I don't believe HPQ is one of them.

    Gary O

  • Report this Comment On November 18, 2013, at 2:06 PM, viperciara wrote:

    I have owned ONVO since the low $4's, I still am buying when I get a chance! This stock is going to rocket, I would rather get in now than wait till its 25-30 a share! You also if you read your whole article must feel the same because you own shares.

  • Report this Comment On November 18, 2013, at 2:21 PM, TMFCheesehead wrote:

    @viperciara-

    I am a shareholder, though I'm careful not to allocate to much to a company's that's definitely still in the developmental state.

    If the company ends up fulfilling all of its potential, I might have to buy at higher prices as I add to my position, but I'm ok with that.

    Brian Stoffel

  • Report this Comment On November 18, 2013, at 2:45 PM, Finefibras wrote:

    I pity the Fool who rushes into 900% year to date stock with no product.

    Irrational Exuberance

  • Report this Comment On November 18, 2013, at 3:03 PM, Hibiscusanole wrote:

    Animal lovers have been trying to prevent animal testing since at least the 1980's. L'Oreal has finally decided to give ONVO a contract to substitute for cuddly bunnies.

    I left DDD before the weird bull market. Have to make up the money with ONVO.

  • Report this Comment On November 18, 2013, at 3:07 PM, Just1Tom wrote:

    OK...I'll try this again...I wrote an "instablog" about ONVO a couple of weeks ago on Seeking Alpha but don't know if anyone saw it.

    My take on Organovo was/is this: A buyout would certainly be possible (I figured around $13.50 per share) since it would make sense for a large pharma company in terms of growth and medical advances.

    I have a post split cost basis of $24.97 in 3D Systems, and, I think HWP missed the "purchase growth" boat by not buying 3D a year ago.

    That said, with ONVO we have what I call "Adventure Capital".

    I am a long term investor (1000 shares at $2.33 for the IRA; 100 at $7.00 for the granddaughter; and 5,000 at $7.35 for another person's Trust account).

    In Venture Capital circles, an investment usually takes about 10 years to come to fruition.

    The Dot.Com bubble was an anomaly.

    Bubbles were also seen in the "Genetic" stocks like Cetus,Genetech, as well as Semiconductor stocks Intel,AMD, Micron,LSI Logic,Intersil,etc.

    With each "bubble" about 5 of the "top" companies in the industry will survive, while the rest fall by the wayside, or struggle mightily to maintain existence.

    Organovo is a "niche" company within the 3D printing arena. There are not so many "me too" companies going public in their path.

    I am reminded of a semiconductor company, Xicor, and how it traded prior to having major sales of their patented E2PROMs.

    EEPROMS eventually became a "commodity" type semiconductor but, look how large the market became.

    Organovo's "niche" is not so easy to duplicate, although there are private companies working in the same basic arena, we have the capabilities to invest in the future growth of an industry that is going to be so dynamic, I want to be there. So, Organovo is the way for me, as a "little" guy to play in the space.

    Livers are not the only things to look forward to. How about stem cells? Geez, talk about politically correct, this could give stem cell research a whole new capability without killing animals, babies, and whatever else gets tossed into the complaint hopper.

    Do I want ONVO bought out? Nope. However, if it does come about, I can only hope that people that sell their shares before merger completion put in a GTC order at $99 per share to make the "short sellers" pay up.

  • Report this Comment On November 18, 2013, at 3:11 PM, jpokergman wrote:

    HPQ can't find their nether regions with both hands, and a pack of dogs......What makes you think they could possibly execute a takeover in an area that is red hot?

    With the emphasis on "execution"....????

    ONVO has a unique line of law patents, which even Wall St. Lawyer's will figure out, that without a viable competitor with both Doctor's and the business "Savvy" with which Murphy brings to this particular Part-eee`, I am afraid that any such take-over attempt, will bring many, many sharks to this feast.

    HPQ, may have wrung the dinner bell......But Dear sweet child Brian Stoffel, you are way to young to be thinking that the "Barbarians" are now civilized, just because a few decades went by, and some have learned to shave, and even perhaps brush their teeth.....

  • Report this Comment On November 18, 2013, at 3:43 PM, Just1Tom wrote:

    Re: HWP buyout...Yeah, I don't see that happening but, stranger things have happened. IBM buying Lotus comes to mind.

    If I had to hazard a guess, a "buyer" would probably be one of the ONVO "venture" partners. They are just going to get to pay us now for "future" revenues.

    I am probably a seller around $27. That's my price objective and, I'm sticking to it.

  • Report this Comment On November 18, 2013, at 3:43 PM, Just1Tom wrote:

    Sorry, it's HPQ now, not HWP....Showing my age. Sorry.

  • Report this Comment On November 18, 2013, at 4:40 PM, Jon0617 wrote:

    Excellent. I showed an old friend a snapshot of my portfolio, and my returns caught his attention. I wanted to show him why Organovo is so interesting to me, and yet I advise against diving in head-first despite the 100%+ return since I started investing.

    Nice timing.

  • Report this Comment On November 18, 2013, at 4:50 PM, 3Dexplosion wrote:

    ONVO has yet to explode upwards even close to what it is going to begin doing next year. I am hanging on to my significant number of shares for the long haul. The current year run up has been fantastic. I won't panic after a big drop if and when that happens. ONVO will just continue to bounce back and rise even further. In the long run, I expect ONVO to even outperform AAPL and AMZN over the next 10 years compared to their two great historical stock runs.

  • Report this Comment On November 18, 2013, at 8:56 PM, Finefibras wrote:

    IRRATIONAL EXUBERANCE?

  • Report this Comment On November 19, 2013, at 4:01 PM, coffysk wrote:

    Brian, do you know something we don't :)

    'Organovo Investors: Tread Carefully' is quite appropriate for today's 25% fall!

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