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Could Guardant Health Be a Millionaire-Maker Stock?

By Zhiyuan Sun – Jun 13, 2020 at 8:10AM

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Here's why momentum is not yet over for this emerging cancer blood test company.

It has been less than two years since Guardant Health's (GH -1.75%) IPO in October 2018. Since that time, shares of the cancer diagnostic company have returned 298%, compared to the S&P 500's 2.47% return during the same period. A modest investment of $10,000 in Guardant Health's IPO would have grown to $39,863 today.

While the stock has enriched shareholders in the past, I think its winning streak is far from over. Let's take a look at why Guardant is a spectacular buy for investors with a long-term outlook. 

Lab technician with mask and glove holding test tube with blood sample.

Image source: Getty Images.

A leader in cancer diagnostics

Currently, the prevailing method of cancer diagnosis is tissue biopsy, which is a procedure that involves the removal of a small sample of suspected tumor tissue by a physician for laboratory testing. The method is accurate but invasive, especially for certain types of cancers such as brain cancer, where a needle must be inserted through a small hole drilled through the skull to extract the sample.

Fortunately, Guardant Health is developing a new set of technologies in cancer diagnosis focused on liquid biopsies. A liquid biopsy involves obtaining a sample of a patient's blood and analyzing the sample in a laboratory for fragments that have broken off of tumor cells. The company's liquid biopsy test is called Guardant360 and it's a high-quality innovation.

In fact, Guardant360's sequencing method is 1,000 times more effective than standard sequencing methods and results in 99.9999% specificity (the ability of a test to detect a positive without it being a false positive). Nearly all false-positive cancers can be ruled out by Guardant360. 

As a result, the test has become very popular among oncologists (doctors who specialize in cancer). Since its launch in 2014, between 7,000 to 8,000 oncologists have used Guardant's tests. In the first quarter of 2020, the number of clinical tests distributed amounted to 15,257, representing a 60% growth from the same quarter last year.

Meanwhile, the company also manufactures GuardantOMNI tests that are responsible for helping clinical investigators screen for patient eligibility for clinical trials involving cancer drugs. The product has also performed well, with 5,266 tests sold in Q1, representing a 40% increase year over year.

Guardant Health's revenue has also skyrocketed during this period to $67.5 million, representing year-over-year growth of 84%. At the same time, its net loss amounted to $27.7 million, or $0.29 per share, which was comparable to last year. The company is not profitable largely because it is reinvesting at least 50% of its sales back into research and development.

Short-term troubles

Unfortunately, the company's track record of growth has been materially affected by the COVID-19 pandemic. As a result, it has pulled its fiscal 2020 guidance for its revenue and earnings per share expectations. In March, clinical visits in the U.S. were down 30% compared to last year, significantly affecting the ability of patients to take the Guardant360 test.

The company has also recognized delays in its clinical evaluation of LUNAR-1 and LUNAR-2 testing programs, which are being studied for cancer recurrence and early-stage cancer detection, respectively. In the case of LUNAR-2, the investigation has been largely halted as it requires patients to sign up for a colonoscopy as part of the study. Unfortunately, such elective procedures are being deferred by clinics and hospitals to conserve resources to combat COVID-19, resulting in significantly lower patient enrollment for LUNAR-2.

So is the stock a buy?

There is no doubt Guardant Health will be facing significant headwinds on the short-term horizon. While its 15,257 clinical tests represented a substantial growth from last year, they were mostly flat quarter-over-quarter after just one month of negative effects from COVID-19 in March. Guardant Health's growth may witness a reversal this year and the next. With fears of second- and third-wave COVID-19 outbreaks on the horizon, investors should continue to expect declines in the number of cancer diagnostic tests until a vaccine or effective treatment for COVID-19 is approved by the U.S. Food and Drug Administration. 

However, for investors with a much longer outlook and the ability to weather temporary business declines, the stock is a solid buy. Its Guardant360 test is regarded as one of the best on the $35 billion cancer diagnostics market. Besides, the company's financial situation just got significantly better, as it raised $315 million in gross proceeds in early June with a stock offering. The company's cash and short-term investments now total over $1 billion, and it has backing from the world-renowned institutional investor Softbank Investment Advisors

In all, I expect the company's double- to triple-digit percentage revenue growth to pick up again after the COVID-19 pandemic subsides. Guardant Health is an excellent pick for healthcare investors who are passionate about growth and want wealth generation for years to come.

Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Guardant Health. The Motley Fool has a disclosure policy.

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