Despite crushing the S&P 500 -- 180% to 63% -- since its September 2019 IPO, 10x Genomics' (TXG +4.58%) shares have only experienced 6% growth year to date. The company has rapidly become a cornerstone of biomedical research with its laboratory devices capable of profiling individual cells, but investors recently seem to have shrugged. Does the stock price just need a few quarters to catch up to its valuation? Or should investors be worried?
We are witnessing a scientific breakthrough
Patrick Bafuma: Every so often, there is a technological innovation that enables the next wave of scientific discovery. Illumina was able to reduce the cost of sequencing the human genome from $1 million in 2007 to under $1,000 by 2014 with its DNA sequencers. And now 10x Genomics has brought the ability to look inside a single cell and its spatial interactions like never before -- unlocking a new age in biological research.
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Scientists have an appetite for the instruments made by this visionary research company. With its devices installed in all of the top 100 research institutions as well as the top global pharmaceutical companies, they are considered a prerequisite for today's cutting-edge biological research.
Plus, 10x Genomics has seen steady and impressive growth in both its installed base and associated accessories since its inception. It even grew revenue by more than 20% in FY 2020 when COVID-19 shut down many research labs. With this year's revenue expected to reach $500 million (60% higher than in 2020) and a $25 billion addressable market, there is still plenty of room for continued growth.
Sure, at a price-to-sales ratio of 35, the stock looks expensive. But you get to own a dominant company that has plenty of runway to go. 10x Genomics has created its own market and is actively growing it. And it has a loyal and loving fan base of scientists.
I fully believe today's shareholders will be rewarded similarly to those who bought Illumina in 2007. It might be a bumpy ride and the stock might look expensive today, but this is a rare opportunity to get in early on a visionary company transforming its field.
This stock isn't for the faint of heart
Alex Carchidi: I think that 10x Genomics could become a company that's worth owning, but it isn't the right stock for everyone and it faces a few headwinds related to the adoption of its products that investors should heed.
First off, many of the company's single-cell analysis products directly compete with hardware offerings from entrenched competitors like Illumina as well as smaller but older companies like Fluidigm. Because its hardware analyzers can only be used with its own branded accessories and software platforms, customers face a significant barrier to entry.
And while the company claims it has reduced the upfront and ongoing costs of owning and operating its analyzers, it's likely that affordability is still a sticking point for many potential customers. The company doesn't publicly disclose its prices, but devices with similar capabilities can sometimes cost as much as $250,000 or more.
Importantly, with its products priced the way that they are, 10x Genomics still isn't profitable yet -- and it's unclear if or when it will be. Its gross margin of 80% hasn't improved over the past year. If the company is losing money on every new device or shipment of accessories, onboarding new customers will just accelerate the losses.
Separate from the issues of customer acquisition and profitability, its stock has been extremely volatile over the past 12 months -- seesawing back and forth and essentially going nowhere even as the market has soared more than 30%.
So between its volatility and lack of profitability, conservative investors should probably steer clear of this stock for now. If 10x Genomics can show that it's making more money from its customers than it's putting in, it might be worth reconsidering.
Growth comes at a price
With its sky-high valuation, 10x Genomics isn't a low-risk stock. While the company is dominant in its field and has a long runway for expansion, serious competition entering the field could hamper its growth. For intrigued risk-tolerant investors who are looking for exposure to the life sciences sector, 10x Genomics offers fantastic, upside potential. But investors who prefer less volatility may want to watch and see how this growth story unfolds -- or pass altogether.
