OraSure Technologies, Inc. (NASDAQ:OSUR) stock surged in 2017 along with the popularity of its discreet self-testing kits for hepatitis and HIV. In recent quarters, though, investors have been backing away from the stock. 

The burgeoning market for simple, discreet testing services has a lot of room to grow, but juicy profit margins never last very long in the cutthroat diagnostics industry. Can OraSure's consumer diagnostic services deliver more market-beating gains in the years ahead?

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Image source: Getty Images.

Reasons to buy 

International demand for easy self-administered testing helped this company report a big 265% jump in international HIV revenue during the three months ended June, and OraSure isn't a one-hit wonder. The company's molecular collection system segment, which generally sells products to academics and other researchers, saw a surge in consumer DNA collection kits in 2017. Plus, a legal settlement with Ancestry.com last year has led to a significant stream of high-margin royalty revenue.

The stock has slid around 29% from a peak in the latter half of 2017. At recent prices, it trades at around 36.7 times this year's earnings expectations. That's miles above the S&P 500 average of 17.7, but a lot less than investors were willing to pay less than a year ago.

The company has started showing signs of a slowdown recently, but it also has a new CEO that's ready to pull the trigger on acquisitions of other companies and technologies to help power the company's next growth phase.

OSUR Revenue (Quarterly) Chart

OSUR Revenue (Quarterly), Data source: YCharts.

Reasons to be nervous

The diagnostics industry is awfully competitive, and OraSure's product sales have been showing signs they might not be able to handle the pressure. Total second quarter product revenue decreased 1% to $38.8 million in the second quarter of 2018. A tiny slip in a single quarter isn't necessarily bad, but few diagnostics companies command P/E ratios above the market average. If OraSure's top line doesn't return to double-digit annual growth in the quarters ahead, the stock will tumble.

Although international sales of the company's OraQuick HIV test jumped 180% in the second quarter, domestic OraQuick HIV and Hepatitis C virus (HCV) test kit sales fell 17% and 18%, respectively. The company's feeling pressure abroad as well. International OraQuick HCV sales fell 78% to $2.1 million in the second quarter due to some big customer losses, one of which switched to a cheaper competitor.

Sources of tomorrow's growth?

OraSure's microbiome business is still fairly small at around 4% of total revenue, but sales of the intestinal bacteria collection kits are growing fast. Second quarter microbiome sales rose 116% on the year, and 43% compared to the first quarter. There isn't much you can do to change your DNA, but it isn't hard to alter the collection of microbes that line your gut. Repeat customers could make this a top performing segment in the quarters ahead. 

Big red question mark on a pile of cash.

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The company's shipping lots of low-cost HIV tests to Africa in association with a Charitable Support Agreement that's connected to The Bill and Melinda Gates Foundation. Investors will be glad to know a majority of self-testing revenue that originates abroad isn't covered by the agreement, which suggests that OraSure can compete on its own in an exploding worldwide market. A recent report from the World Health Organization expects annual global self-test volumes to grow from 1 million purchased in 2017, to an estimated 16.4 million tests by the end of 2020.

International HCV sales recently collapsed, but management expects improved funding for several federal programs that support HIV and HCV testing in the U.S. Now that drugs to treat both viruses are more accessible, demand for testing could accelerate in the years ahead.

A buy now?

Following OraSure's product revenue statements from quarter-to-quarter feels like watching a game of Whac-A-Mole with random products surging one period, then sinking the next. It won't be easy, but I think there's a solid chance that OraSure can maintain a significant chunk of its existing market share while adding new customers at a rate that keeps the entire needle moving forward at a moderate pace.

Unfortunately, this stock will tank if moderate growth is all investors think they'll be able to get from OraSure. The stock's fallen, but it still trades at around 5.6 times trailing sales. For comparison, Quest Diagnostics, a longtime leader in the diagnostics space, grew earnings at an annual rate of 10.5% over the past five years. Quest is a relatively safe bet, but it rarely trades above 2.0 times sales, where it sits at the moment. 

If the market keeps nudging OraSure's valuation toward the industry average, investors buying shares at recent prices will lose a bundle. Until we see signs this company can avoid the slim profit margins that plague its peers, it's best to watch from the sidelines.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.