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Should Growth Investors Buy This Genetic Diagnostics Stock?

By Kody Kester – Dec 2, 2021 at 7:30AM

Key Points

  • Veracyte's third-quarter revenue grew 94% year over year to $60.4 million.
  • The company has $163 million in net cash to fund more research and development.
  • It is trading at a price-to-sales ratio of around 13, which is only about half the company's annual growth potential.

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Veracyte has sharply rebounded from the COVID-19 headwinds that it faced last year and should continue growing.

Aside from getting the entry point right on an investment, being a growth investor arguably boils down to two key factors: picking a well-run company, and one that's operating in an industry set to experience tremendous growth.

Given the increasing emphasis on early diagnosis and treatment of diseases, market research firm Global Market Insights anticipates the global genetic-testing market will grow 11.6% annually from $14.9 billion last year to $31.9 billion by 2027. As a quality, midsize genetic-diagnostics company, Veracyte (VCYT -0.27%) is large enough to continue innovating, yet nimble enough to adapt to a rapidly changing industry.

What makes Veracyte a great business? And should you buy the stock at its current valuation? Let's dig in to answer these questions.

A person working in a lab while pulling out a test tube.

Image source: Getty Images.

Splendid top-line growth

Veracyte reported $60.4 million in revenue during the third quarter, which represents a 94% year-over-year increase. How was the company able to nearly double its revenue over the past year?

The company's testing revenue surged 80% year over year to $50.9 million. This was the result of nearly 19,000 tests being administered during the quarter at an average sale price of approximately $2,700 per test, according to its recently appointed chief financial officer, Rebecca Chambers.

More than 11,000 of these tests were the Percepta genomic sequencing classifier (GSC) used to detect lung cancer, the idiopathic pulmonary fibrosis test (for a serious lung disease) known as Envisia GSC, or the thyroid cancer test known as Afirma GSC. The remaining 7,500 tests during the quarter were bladder and prostate cancer Decipher tests to help guide treatment for patients.

Veracyte's product revenue grew 46% year over year to $3 million. Chambers said this growth was driven by the increased volume of the company's breast cancer genetics test, known as Prosigna, to around 2,150 tests in the third quarter. And Veracyte's other revenue soared nearly eightfold year over year to $6.5 million during the third quarter. This was largely the result of the $4.7 million revenue contribution from the acquisition of the colon-cancer test maker HalioDx that Veracyte completed earlier this year.

As a result of its solid performance in the third quarter and the acquisition of HalioDx, Veracyte upped its midpoint revenue guidance this year from $204 million to $214 million. The latter revenue figure would represent 82.5% growth compared to last year.

Veracyte's ability to execute savvy acquisitions, launch new products, and expand insurance coverage of its products has enabled the company to grow its revenue by nearly 27% annually from 2016 to 2021 (assuming the company generates its projected $214 million in revenue this year). And with analysts forecasting a 25% increase in revenue to $267 million next year, this growth looks to remain steady.

A balance sheet swimming in liquidity

Veracyte is growing its revenue at about double the rate of its industry due to its excellent execution. But the other important factor that should allow revenue increases to continue outpacing its peers is the company's nearly flawless balance sheet.

The company had $164 million in cash on hand at the end of its third quarter, against only $1.1 million in long-term debt obligations. With a market capitalization of $3 billion, this implies that 5% of Veracyte's market cap is made up of cash. This gives the company the necessary resources to drive revenue even higher with research and development or bolt-on acquisitions.

An enticing valuation for its growth potential

Since Veracyte is in the early chapters of its growth story, the company isn't yet producing steady profits for its shareholders. That precludes traditional valuation methods such as the price-to-earnings ratio, so I'll use the price-to-sales-growth (P/SG) ratio instead. A P/SG ratio of less than 1 indicates a valuation that's anywhere from reasonable to potentially attractive for a stock's future growth.

Given its current $41 share price, Veracyte trades at a price-to-sales ratio of approximately 14 based on its revenue guidance for this year. With a mid-20% annual growth rate in the intermediate term, this is a P/SG ratio of around 0.5. Thus, I believe that at its current valuation, Veracyte provides high growth at a significant discount.

Kody Kester has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Veracyte. The Motley Fool has a disclosure policy.

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