You won't find too many hotter stocks on the market right now than Bionano Genomics (BNGO 4.40%). In 2020, shares of the genome analysis company soared 148%. What makes that gain even more impressive is that Bionano was down 55% year to date as of Dec. 22. The stock's remarkable jump came in the last few days of the year.
It gets even better. Bionano stock has more than quadrupled so far in 2021. The company's market cap has skyrocketed more than 600%, generating stronger growth than its share price because of two diluting stock offerings. Should you buy Bionano Genomics? Or is this sizzling healthcare stock too hot to handle?
A distinct competitive advantage
When evaluating fast-rising stocks like Bionano, first look at its competitive advantages. If there isn't a sustainable competitive advantage, stay away. The good news for Bionano is that its technology sets it apart from others.
The company focuses on cytogenomics -- the detection of genetic disorders by analyzing the differences in chromosomes. In particular, Bionano's technology looks for large structural variations that can cause diseases. These structural variations can include DNA base pairs measured in the hundreds or up to millions.
Sure, there are several companies that are much larger than Bionano that can analyze genetic differences. Illumina, for example, is the 800-pound gorilla in what's called short-read sequencing, a cost-effective approach that can be performed at very high throughputs. Oxford Nanopore and Pacific Biosciences of California are leaders in long-read sequencing, which can sequence parts of the genome that short reads can't.
So how can little Bionano go up against these established players? Their sequencing systems can't reliably detect the large structural variations that Bionano's Sapphire system can. It's not surprising, therefore, that medical research institutions like Duke University, the Mayo Clinic, and Penn State College of Medicine have turned to Sapphire to research multiple diseases.
How Bionano is doing so far
A competitive advantage isn't enough by itself to make a company successful. After all, the metaphorical junkyard is filled with technologies that were once widely viewed as better than alternatives. A company has to execute very well to capitalize on its competitive edge. So how is Bionano doing on this front so far?
The company continues to lose a lot of money -- nearly $10.8 million in its last reported quarter. Bionano's bottom line is getting worse rather than better as its spending increases significantly. However, that's not all that unusual for companies in their early stages of growth.
The more important metric to watch is sales growth. Unfortunately, the story isn't any better there. Bionano's trailing-12-month revenue is declining.
This combination of sinking sales and rising expenses means that Bionano must pull from its cash stockpile. As mentioned earlier, the company has conducted two stock offerings already this year, one for gross proceeds of $101.8 million and another for $230 million.
To buy or not to buy?
Bionano's less-than-inspiring financial results wouldn't be all that concerning if the company was at the cusp of shifting into high gear to capture a big chunk of an enormous market. While I wouldn't be surprised at all for Bionano to gain more market traction in 2021, there's one glaring problem: The stock's rapid rise makes its growth prospects look less appealing.
Thanks to those big gains achieved in late 2020 and so far this year, Bionano Genomics' market cap now stands at close to $2.3 billion. The company estimates that its market opportunity is between $2.6 billion and $3.8 billion. And that's if it can sell up to 10,000 Sapphire systems.
The reality is that much of Bionano's growth opportunity is already baked into its share price. I like the company's technology. However, my view is that Bionano stock doesn't offer an attractive risk-reward proposition right now.