What happened

Shares of genetic data miner 23andMe Holding (ME -1.73%) had a good week last week, surging more than 13% in response to a positive second-quarter 2022 earnings report Thursday. But as I warned at the time, the news wasn't quite as good as it looked, and 23andMe's gains started fading on Friday.

Things got even worse today, when investors responded to a downgrade of 23andMe stock by a Citigroup analyst -- by selling off the stock by 10.1% (as of 11:30 a.m. EST).

Chalkboard drawing of stock chart arrow going up being erased and pointing back down.

Image source: Getty Images.

So what

In my own note on the company last week, I pointed out that sales growth at 23andMe was a weak 7% in Q2, down steeply from Q1's 23% growth pace. Additionally, I noted that the company's lower-than-expected losses in the quarter didn't carry over into guidance, with management continuing to forecast a $210 million to $225 million loss for this year -- and now here comes a Citi analyst with additional criticisms of the company today.

According to The Fly, analyst Daniel Grosslight wrote Friday that the stock has enjoyed "a 70%+ run over the past month," leaving "little room for upside" at this point. Although he is optimistic about 23andMe's acquisition of Lemonaid Health, and the potential for new revenue from its partnership with GlaxoSmithKline, on balance, he sees 23andMe as no more than a $13 stock -- and therefore already fully valued (as of Friday's close).

Now what

If there's one bright light for 23andMe investors, though, in Citi's report, it is this: Currently, 23andMe gets essentially all of its revenue ($244 million worth) from its consumer and research services division -- selling genetic testing packs and telling customers where they come from and what ailments they might have in the future.

The company's therapeutics division, on the other hand -- which aims to turn the data collected into practical treatments for patients -- generated a paltry $100,000 in revenue last year. Yet, according to Citi, therapeutics is worth just as much to 23andMe's future valuation ($2.8 billion) as the more mature consumer division (also worth $2.8 billion).

The sum still works out to roughly 23andMe's current market capitalization of $5.6 billion -- but you can expect most of the growth going forward to come from therapeutics.