Shares of Exact Sciences (EXAS -1.35%), a molecular diagnostics company with a lead product that helps physicians diagnose colorectal cancer and advanced adenomas, surged as much as 12% on Friday after receiving a welcome price target upgrade from a Wall Street firm.
Before the opening bell, Doug Schenkel, covering analyst at Cowen & Co., raised his firms' price target on Exact Sciences to $45 from $40 and maintained his outperform rating on the company. The reason behind the price target hike stems from the Spring 2017 Cologuard Survey (Cologuard is the aforementioned lead diagnostic product), which boosted Schenkel's confidence in uptake for the diagnostic test over the next three years. Schenkel suggested that revenue could top $700 million in 2019, which is $200 million above its current forecast, and touch $4 billion at its peak.
This price target upgrade also follows better than expected first-quarter results reported by the company last week. Revenue for the quarter rose by 226% to $48.4 million, which wound up crushing Wall Street's expectations that had called for $37.4 million in sales. In total, Exact Sciences completed about 100,000 Cologuard tests during the quarter. It also wound up losing $0.32 per share, which was $0.09 per share narrower than expected.
Exact Sciences raised its full-year guidance, too. It now sees full-year sales coming in between $195 million and $205 million, up from a prior forecast of $170 million to $180 million, and well ahead of the Street. It also foresees test volume at 470,000, up from a previous forecast of 415,000.
On one hand, there's little denying the progress that Exact Sciences is making. Its losses are finally beginning to narrow as its revenue shoots through the roof. The company is also benefiting from improved insurer coverage, even though Medicare patients tend to be its target audience.
However, this Fool can't help but be skeptical about a company with a valuation that has exploded higher over the past year, and isn't even expected to deliver recurring profits until 2020.
What's more worrisome, in my view, is Exact Sciences reliance on Medicare. Lawmakers on Capitol Hill have been looking for ways to reduce third-party reliance on Medicare for years. The fear would be that reimbursement rate growth will slow, or perhaps even decline, which would be bad news for Exact Sciences.
The company does have an exceptionally high short ratio, so some of this recent rally could be fueled by pessimists running for the exit. Over the more intermediate-term, though, I'm not a fan of Exact Sciences current valuation and would suggest investors stick to the sidelines.