23andMe Stock Could Be a Big Winner If This 1 Thing Happens

In June, 23andMe (ME 1.11%) officially finished the process of going public via a special purpose acquisition company (SPAC). These investment vehicles were popular in early 2021, but many have lost value in recent months. This includes 23andMe stock, which currently sits almost 50% below its all-time high. 

While no one knows where shares of the genetic-testing company will trade in the near term, investors have a better idea of where 23andMe stock can trade over the long term. Over the course of years, stock prices tend to correlate with cash flows and, therefore, if the company dramatically increases it cash flows, the stock price could head higher as well. And in this video from Motley Fool Backstage Pass, recorded on Oct. 5, Fool contributor Jason Hall explains to fellow contributor Jon Quast the one thing that could transform 23andMe's cash flows.

Jason Hall: What is 23andMe? I think we've all seen their ads, so we know somebody that done it or we've done it ourself, which where you can get your own genetic profile. You can pay them 100 bucks, 130 bucks, different levels that they offer, and they do your genetic screening. You send in the swab, and they do the screening and they can also provide you with information about some specific genetic markers that indicate if you are at certain risk profiles for certain types of cancers and other health concerns. It's a really interesting thing that you can get right off the bat.

The other thing that they do, and this is really important, is about 80% of the customers also allow the company to use their data for research. This is enormously valuable data for the healthcare industry and in particular the pharmaceutical industry.

Here is a slide from the company's presentation. It talks a little bit about how there's potential value for the pharmaceutical industry. On average, from the time the pharmaceutical companies develop a drug, to actually filing an investigation of new drug application with the FDA, it takes about seven years. The total costs by the time they finish going through all of their filings is between $2 billion and $3 billion and 90% failure rate: 90% never reach a successful outcome in terms of a drug that's commercially available.

Now, what 23andMe says, they have a deal right now, partnership with GlaxoSmithKline. They are working on a drug, and it took four years for this specific drug that they are working on to go through that same process that takes seven years on average for the pharmaceutical industry. That is a enormous shortening of the time, and it should lead to a shortening of the cost. The other thing that highlighted on that slide was historically, targets with genetic evidence have a higher success rate. Again, so that 90% failure rate, the idea is that number should fall substantially.

The biggest part of the thesis for 23andMe is their ability to use all of the data that we give them, that we actually pay them to give them, really, because we're paying them 100 bucks a pop and we let them use the data, is that the data should be able to be used to develop better medical treatments. That should be beneficial to all of society, and it should be worth a tremendous amount of money to 23andMe. I think at the price that it's trading for now, it's certainly worth a look.

I will share one more chart because this gets back to what Jon was talking about with Skillz earlier. You got to get into the numbers and understand because this is still a business. It's very much in growth mode. Revenues were just over $59 million in the one quarter that it's reported as a public company, and it lost $42 million. So $42 million dollar net loss. And here's the thing, this isn't like a lot of other companies that we cover that are in high growth mode, that have big losses, but then also have positive cash flows. The company had $44.5 million in negative cash flows in operations. It's spending an enormous amount of money to support its operations, so those revenues need to grow. You see right here at the top, $769.9 million, that's how much cash it has on its balance sheet. That's a product of coming public, through the SPAC process. It has a lot of cash that's going to cover a lot of quarters of cash burn. But you really need to focus on seeing revenue growth as its partnerships develop and it gets a larger share of income from potential future treatments.

Jon Quast: Yeah. That's really good. I meant to say that with Skillz, $700 million in cash on the balance sheet versus a $3.9 billion market cap, that's really interesting.

Hall: Yeah.

Quast: I'm super bullish on this trend that you're talking about, Jason. This is big data in anything, but specifically in medicine. I would imagine that that is actually going to be a high-margin business for 23andMe.

Hall: It should be because a substantial amount of the development costs like the GlaxoSmithKline one, for example, is a 50-50 partnership. GlaxoSmithKline is mostly taking on the development expense. It's the data that it's getting from its partnership. It could be enormously profitable. Even one blockbuster drug, this could be worth half a billion dollars in cash flows a year to the company. It's enormous the potentials that it could be.