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Why 23andMe Rocketed 27.9% Higher in October

By Brett Schafer – Nov 2, 2021 at 3:48PM

Key Points

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The genetics upstart is acquiring a telehealth platform.

What happened

Shares of 23andMe (ME 2.88%) jumped 27.9% in October, according to data from S&P Global Market Intelligence. The consumer genetics and pharmaceutical research company announced an acquisition of the telehealth platform Lemonaid Health for $400 million last month, which is the main news that drove up the stock price. The stock also got a boost from the broad market rally in growth stocks to close out October.

So what

23andMe is the company behind the popular genetic testing kits where consumers can learn about their ancestry background and genetic health. The company has been selling these testing kits since 2006, and now has 11.6 million customers in its database as of the end of last quarter. While it plans to continue selling genetic testing kits in the future, 23andMe's main business plan is to leverage its huge database to launch new business lines. For example, the company has invested heavily into drug research, with over 40 programs in development that are supposed to use the insights from 23andMe's database to produce novel solutions for patients.

A person pointing to a chart that is going up and to the right.

Image source: Getty Images.

The acquisition of Lemonaid Health fits squarely into this database strategy. Lemonaid Health is a telehealth platform that offers doctor consultations and access to prescription deliveries for patients. The combined entity will theoretically be able to use 23andMe's huge database and genetic insights to help its patients get better outcomes. For the 11.6 million people who have already given their data to 23andMe, using Lemonaid Health could be even more useful, as doctors on the platform will now have easy access to their specific genetic code.

Now what

23andMe has a market cap of $4.7 billion and generated $255 million in revenue in the last twelve months, the majority of which comes from DNA testing kits. In Q1 of this fiscal year, which covered the three months ending in June, 23andMe's revenue grew 23% year-over-year to $59 million. While this looks good, the company's overall revenue has actually declined each of the last two fiscal years, from $441 million in fiscal year 2019 to $244 million in fiscal year 2021. This does not bode well for the trajectory of the DNA testing business.

If you are invested in 23andMe, you need to be bullish on the company's prospects with this telehealth acquisition and its drug research. Both these markets are huge and growing, and if 23andMe's genetic database truly gives the company an advantage, it could gain market share from competitors rather quickly. A pivot like this is a risky proposition, but if management can pull it off, 23andMe could be a much larger business a decade from now.  

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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