The genetic testing industry has been synonymous with growth in recent years. Advances in high-volume DNA sequencing, data interpretation, health insurance coverage, and pharmaceutical company partnerships have combined to create profitable businesses with ample long-term growth opportunities.

Not all genetic testing companies are created equal, however. NeoGenomics (NASDAQ:NEO) is the only dedicated oncology reference lab with a comprehensive testing menu, offering physicians and companies running clinical trials access to a powerful platform for peering into the human genome. Meanwhile, Invitae (NYSE:NVTA) is building a platform capable of screening individuals for a broad array of diseases, then helping them to interpret the data. It's even making a relatively unconventional bet that clinical-grade, direct-to-consumer genetic testing will take off in the near future.

Here's why investors should keep an eye on these two growth stocks.

Paper cut-outs of balloons carrying dollar signs.

Image source: Getty Images.

A one-stop shop for oncology genetic services

NeoGenomics focuses on genetic testing services. It operates two segments: clinical services and pharma services. The former serves as a reference lab for oncologists, pathologists, and hospitals seeking insight on patient samples. The latter helps pharmaceutical companies discover novel biomarkers, decipher genetic data from clinical trials, and develop diagnostics.

In the first nine months of 2019, total revenue grew 51% and operating profit increased 48% compared to the year-ago period. NeoGenomics expects at least $401 million in full-year 2019 revenue, although it has raised guidance for four consecutive quarters, so investors shouldn't be surprised if the actual results are significantly better. 

What has fueled the company's impressive growth streak? There are a handful of catalysts, but two in particular stand out. 

First, NeoGenomics has positioned itself to become a non-competitive partner to customers. The nationwide, regulated labs of NeoGenomics can conduct a variety of tests and augment the capabilities of local and regional pathology labs. Even as regional labs become larger and move technical services in-house, the company can still remain a customer through its novel data consultation offerings. 

Second, NeoGenomics has kept up with the quick pace of innovation in genetic testing. The company continuously adds new tests to its menu, like liquid biopsies, and new metrics to its reports, such as microsatellite instability (MSI) and tumor mutational burden (TMB). That keeps existing clients coming back for more and attracts new customers to the platform.

Investors should expect the business to continue humming along in 2020, although it may be tough to match the 132% gain shares delivered last year. But if efforts to grow pharma services, which accounted for only 12% of total revenue in the first nine months of 2019, are successful in the coming years, then NeoGenomics should easily maintain its status as a formidable growth stock.

A doctor in the background and a model of DNA in the foreground.

Image source: Getty Images.

Will a direct-to-consumer market develop?

Invitae focuses on making genetic testing available to the masses. The company has continuously invested in hardware, software, and genetic counseling services to handle massive volumes of biological samples and lower the cost per test. By working with individuals and their physicians, Invitae wants to empower consumers to know, own, and control their genetic data.

In the first nine months of 2019, total revenue grew 47% compared to the year-ago period. In the third quarter of 2019, test volumes soared 65% year over year to 129,000, while the cost of goods sold per sample dropped from $262 to $249. The latter would have been lower excluding costs associated with integrating newly acquired technologies. 

While growth has come easy for Invitae, it's come at the expense of profits. A recent decision to pursue near-term growth at any cost drove operating losses to $165 million in the first nine months of 2019, compared to a loss of $96 million in the year-ago period. The primary reason for the deteriorating performance has been the large investments in building a direct channel for consumers and clinicians. The goal: reduce the hurdles for individuals and doctors to access high-quality genetic data for specific applications.  

Those investments include acquisitions aimed at driving long-term reductions in test prices and increases in gross margin, in addition to sales and marketing expenses. The direct channel, which launched in June, was responsible for 13% of total sales and marketing expenses in the third quarter of 2019. Investors can expect that to increase in the coming year. 

Investors monitoring Invitae for its growth potential must keep a close eye on the income statement. If growth fails to materialize, or profits continue to get pushed further into the future, then the business could be in trouble. That said, after exiting September with $473 million in cash and given Invitae's track record of executing, the benefit of the doubt may fall in the genetic testing company's favor.

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.