When it comes to eye-popping growth opportunities, the future of biological technologies offers plenty of potential shots on goal. While some specialties such as synthetic biology are further off in the future, others are unfolding in real time. One such opportunity: unlocking the value hidden in your genome. As it turns out, a little DNA sequencing ("reading" a genome) and statistical analysis can go a long way.

Genetic testing leader Invitae (NYSE:NVTA) provides a great example of the growth opportunity at hand. Consider that in 2014 the business made just $1.6 million in revenue, but full-year 2018 guidance calls for sales to reach at least $130 million. It's difficult to argue with that trajectory. 

This genetics stock has some notable flaws that shouldn't be overlooked, but Invitae could be a gold mine for growth investors if management continues to execute on its long-term strategy.

A white gloved hand holding up a silver platter, with a giant piece of DNA on it.

Image source: Getty Images.

Invitae's business model, explained

The business models of the genetic testing industry have evolved alongside the underlying technology ecosystem. Advances in next-generation sequencing (NGS), new sequencing instruments, and new sequencing enzymes make it possible to realize incredible economies of scale from a relatively small laboratory footprint. Two decades ago, reading one human genome took years and cost over $1 billion. It may soon take less time than your work day and cost as little as $100.

The fast-improving economics suggested it was only a matter of time before entrepreneurs sought to enable more widespread use of genetic data, whether for diagnosing health ailments or determining the best cancer drugs for an individual patient or even influencing digital advertising. However, more widespread use also required radically different ways of doing business with customers.

In the past, companies providing genetic testing services protected their sizable investment in research and development and lab equipment by offering a handful of proprietary tests worth thousands of dollars a pop. It was a lucrative business model built on high prices and low volumes of tests. But it's becoming obsolete outside of niche applications.

Newcomers like Invitae have flipped the old business model on its head by racing to drive test prices as low as possible. The idea is that lowering prices by 10 times will create a market that's 10 times -- or 100 times -- larger. It's still early, but investors probably have enough data to declare this idea is correct.

An hourglass sitting on a table next to three stacks of coins.

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Can triple-digit growth lead to profits?

In the first quarter of 2018, Invitae delivered triple-digit year-over-year growth in test revenue and test volumes, at 169% and 150%, respectively. It was the 20th consecutive quarter of double-digit growth in test volumes. More importantly, investors continue to see improving economies of scale.  

The cost of goods sold per test dropped to just $280 in the first quarter of 2018, compared to $360 in the year-ago period. In fact, Invitae realized one of its best sequential decreases in cost per test, delivering a $40 improvement from the final quarter of 2017. First-quarter 2018 gross profit of $9.6 million blew away the year-ago level of just $1 million, getting the company closer to its goal of 50% gross margin across the platform. 

There's also a budding opportunity to provide genetic testing services directly to biopharma companies, rather than clinicians, as evidenced by a recently expanded partnership with Sarepta for Duchenne muscular dystrophy, a rare genetic disorder. All around, the business trajectory is pretty stunning -- and shows why growth investors are salivating over the long-term opportunity.  


2018 (Expected)




Billable tests






>$130 million*

$65.1 million

$24.8 million

$8.4 million

Gross profit

No guidance

$18.1 million

($2.8 million)

($8.1 million)

Data source: SEC filing.

That said, growth is one thing, profits are another. Invitae's strategy to date has prioritized investing in the business to capture more of the near- and long-term opportunities in genetic testing. While that has generally worked, it has also been accompanied by swelling losses and dilution. The latter has been especially painful for shareholders: There are now 64.7 million shares outstanding, more than double the total from just three years ago. 





Selling and marketing expense

$53.4 million

$28.6 million

$22.5 million

Operating income

($121.3 million)

($100.2 million)

($89.5 million)

Net income

($123.4 million)

($100.2 million)

($89.8 million)

Average shares outstanding

46.5 million

33.2 million

28.2 million

Data source: SEC filing.

Management is acutely aware of the reality on the bottom line (and with dilution), but is correct in noting that it was the only way to scale the business in such a compressed time span. It seems likely that Invitae will continue to suffer operating losses for the foreseeable future (read: at least two more years), although a major improvement could be around the corner.

Invitae is in the process of integrating multiple acquisitions spanning genetic testing services for prenatal and reproductive health. While investors can expect selling and marketing costs to continue to rise significantly as a result, putting the entire portfolio under one roof should enable higher growth and cost savings in other parts of the business.

Additionally, management recently told investors it plans to reduce cash burn by 40% to 50% as 2018 draws to a close. Invitae chewed up $33 million in cash in the first three months of the year, so those efforts will be felt almost immediately. Whether or not reduced cash burn decreases operating losses going forward or simply holds them at current levels remains to be seen.

A cotton swab for a genetic test sitting on a printout of a DNA sequence.

Image source: Getty Images.

Invitae could be a gold mine if...

There aren't many opportunities for growth investors to own a business delivering triple-digit growth. It won't last forever, but it doesn't have to. If Invitae can achieve 50% gross margin and slash cash burn by 40%, then it could be close to breaking even with around $300 million in annual revenue. But that might not occur until 2020.

Stemming the tide of dilution and simply chipping away at operating losses could be interpreted as substantial progress. Combine that with the potential for the company to leverage the market share it has ripped away from competitors over the years, and growth investors could be sitting on a gold mine. It might just require a little more patience in the near term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.