Some investors look at a stock that has nearly quadrupled in price within less than 12 months and are excited about buying it. Others look at the same stock and are afraid that the momentum could evaporate. That's the situation for Exact Sciences Corporation (EXAS -3.85%) right now.
Is Exact Sciences a stock to buy? Perhaps the best way to answer that question is to use the SWOT business analysis technique that assesses an organization's strengths, weaknesses, opportunities, and threats. Here's how Exact Sciences' SWOT analysis looks.
Exact Sciences has quite a few strengths. The most significant strength is the increasing popularity for the company's Cologuard DNA screening test for colorectal cancer. In the third quarter, 161,000 Cologuard tests were completed, reflecting a year-over-year increase of 136%. Exact Sciences also reported an all-time number of providers ordering the tests during the quarter.
Other strengths for the business have helped make this impressive growth possible. Cologuard is now covered for 87% of Americans. Positive actions by the U.S. Preventive Services Task Force (USPTF), the Blue Cross Blue Shield Association (BCBSA), and the Centers for Medicare and Medicaid Services (CMS) have boosted Cologuard's status as a standard of care.
As for Exact Sciences stock's strength, the enormous gains achieved so far this year speak for themselves.
There are three major current weaknesses for Exact Sciences, in my view. First, the company remains unprofitable. In the first nine months of 2017, Exact Sciences lost nearly $93 million. The reality is that the company has lost money since it was formed -- nearly $850 million in total. Exact Sciences expects losses to continue for several more years.
Second, the stock valuation gives investors reason to pause. Exact Sciences shares currently trade at nearly 38 times trailing-12-month sales.
Exact Sciences' third big weakness is kind of the flip side of its main strength. While sales for Cologuard are growing quickly, it's the only product on the market for the company. All of Exact Sciences' eggs are riding in one basket right now.
That leads to one of Exact Sciences' greatest opportunities. The company is actively working on developing additional products. Exact Sciences teamed up with the prestigious Mayo Clinic to develop liquid biopsies for early cancer detection. The cancer DNA markers the two organizations are using should be less expensive than next-generation sequencing. The liquid-biopsy market is expected to reach $13 billion or more by 2030.
There are also huge opportunities remaining for Cologuard. The colon cancer screening rate in the U.S. is stuck at around 62%, but the American Cancer Society's goal is to boost the rate to 80%. Cologuard's convenience and relatively high accuracy should make it a natural solution to help achieve that goal. In addition, there should be room for the company to expand into international markets. With these opportunities, Exact Sciences should be able to grow Cologuard into a multibillion-dollar product.
In June, I examined the bear case against Exact Sciences stock. At the time, I identified three key threats to the company. One was that physicians might not prescribe Cologuard as much as hoped. Exact Sciences' results since then have convinced me that this isn't a big concern.
However, the other two threats remain, at least to some extent. It's still possible that the price for Cologuard could fall. There's also a not-so-insignificant risk that another company could beat Exact Sciences in developing liquid biopsies for early cancer detection.
It's only fair to note several other threats that short-seller Andrew Left of Citron Research thinks that Exact Sciences faces. Earlier this year, Left predicted that the stock price would "soon be cut in half" and possibly be close to worthless within a few years. This claim stemmed largely from his view that Cologuard is an "inferior product" and that Exact Sciences can't continue spending as much money as it is currently to grow the business.
I don't find Left's critique particularly convincing, though. The numbers show that healthcare providers, payers, and patients are accepting Cologuard. And while Exact Sciences is spending plenty of money to grow the business (and posting losses in the process), that's a good business strategy in my opinion. Also, the trend for the company's bottom line is headed in the right direction.
In my view, the strengths and opportunities for Exact Sciences carry more weight than the company's weaknesses and threats. The key for the business is continued momentum for Cologuard and achieving success in its development efforts of liquid biopsies.
I see no reason to think that Cologuard's momentum is in jeopardy. Sustained sales growth for the product over time could address the current weaknesses of losses and stock valuation and the threat of falling prices for the product. And while there's no way to know if Exact Sciences will be successful with its liquid biopsy development program, the threat that another company will be successful is probably still well into the future.
Is Exact Sciences stock a buy? In the final analysis, my answer is "yes." Not long ago, the stock was routinely setting new all-time highs. I thought then that Exact Sciences remained a smart pick. With the share price pulling back some recently, now could be an even better time to buy the stock.