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Here's Why 10x Genomics Can't Satisfy Short-Term Investors

By Brian Orelli, PhD and Keith Speights - Updated Jun 26, 2021 at 10:13PM

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Long-term investors should keep perspective.

10x Genomics ( TXG 2.86% ), which is focused on helping researchers study genomic changes on a cellular level, beat Wall Street expectations in the first quarter, but shares of the company fell substantially. In this video from Motley Fool Live, recorded on May 10, Fool.com contributors Brian Orelli and Keith Speights discuss why the share price dropped and why the short-term move shouldn't affect long-term investors.

Brian Orelli: Not every company had an impressive first quarter. Investors seemed a little disappointed with 10x Genomics. Rhe company makes machines for research. Shares fell over 20% after the earnings release. Their growth seemed solid enough to me, but maybe investors are worried about the earnings loss for the quarter, or were expectations higher than what they actually met?

Keith Speights: Again, I'm going to say that it's more an expectations game here. Now, it's important to note that 10x Genomics actually beat analyst expectations in the first quarter. Their revenue jumped 47% year over year to just under $106 million. That was higher than Wall Street's estimate of $102.5 million.

10x posted net loss of $0.11 per share. That was a pretty significant improvement, though, year-over-year, from its net loss of $0.22 per share in the prior-year period, and it was better than the $0.27 loss that analysts were expecting. The company did beat top- and bottom-line estimates.

I think the problem in terms of the stock falling was probably more related to 10x's full-year guidance. Even with this, I would say exceptionally strong first-quarter growth, 10x just maintained its outlook for full-year 2021. The company expects revenue will be between $480 million and $500 million. Although the midpoint of that range does reflect a pretty hefty 64% year-over-year growth, it's lower than what the analysts were looking for. They were looking for $495 million, and the midpoint of that range that 10x gave is $490 [million], so just a little shy of Wall Street's expectations.

I think the real issue here, Brian, is that 10x Genomics is one of those stocks that's just priced for perfection. Even after the decline last week, its shares still trade at nearly 49 times sales, that steep. Any hint of anything that's less than perfect for a stock that's priced for perfection, such as the slightly disappointing full-year guidance, I think that's the reason for the stock to sell off, and that's what we saw happen. I personally still like the long-term prospects for 10x Genomics. I think they have a strong business and over the long run, this is a stock that could continue to be a winner.

Orelli: I am perplexed with the results. With guidance, it's always difficult to know where management is sandbagging or not, and so I think that that's the question of whether you should be buying at a 20% discount, whenever that 20% loss was last week, or whether you should be worried about the fact that sales might be slowing down if they're not beating the expectations and then not raising guidance.

Speights: When you have a stock that's trading at 49 times sales, the company has to do nearly everything exactly right. There's just no room for any disappointment.

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.

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