High-flying growth stocks like Bionano Genomics (BNGO +1.72%) tend to be controversial among different crowds of investors. Where some might see a stock's potential to multiply in value over time by pioneering new technologies or new business models, others might see the unbounded risk that's associated with trying something new.
But which crowd is right about Bionano? In truth, both sides have a point when it comes to this stock. Let's explore why.
Image source: Getty Images.
The argument for buying Bionano
In my view, the biggest point in favor of investing in Bionano Genomics is that its business model will lead to a huge amount of recurring income over time, thereby leading to a virtuous cycle in which it can afford to funnel more and more money into developing new products.
Bionano makes a genome-mapping instrument called the Saphyr, which is specialized in detecting major structural variations in chromosomes, such as large insertions or deletions and translocations.
That means it's a useful tool for a variety of clinical and research niches, ranging from enabling genetic engineering of crops to detecting genetic disorders. And, most importantly, Bionano claims that competing devices can't do the same things -- nor can laboratory workers easily replicate its data output using manual techniques. Therefore, at least for now, the Saphyr's capabilities are a competitive advantage.
Intriguingly, Bionano is building an ecosystem of consumable products for the Saphyr. Its sample preparation kits and microfluidic sample chips are necessary purchases for anyone to use the system. The idea is that you use the prep kit to isolate and purify DNA from a sample, then load the purified DNA into the chip, which you then insert into the Saphyr for analysis. So any laboratory or clinic with a Saphyr will need to purchase these consumables on a regular basis, and using the device more frequently entails purchasing even more.
In other words, the Saphyr is Bionano's ticket to building a substantial base of recurring revenue over time, which is tremendously appealing to investors. Right now, there are only 164 Saphyrs installed globally, but in 2021, 69% more systems were installed than in the prior year, which means the company's march toward riches is just getting started.
Speaking of revenue, this company is sizzling, though it isn't profitable yet. Its annual revenue has grown by 77.5% in the last three years, and sales in 2021 clocked in at nearly $18 million, a rise of 111% year over year. It also sold 96% more chips in 2021 than it did in 2020, which means that (at least somewhere) there is an ever-growing number of customers who are actually using their devices as intended.
Expect this business to keep adding to the Saphyr ecosystem and developing other analyzer devices. Currently, management expects another device to launch in the first half of 2023. For next year, the company is predicting another 33% to 50% jump in revenue.
To facilitate that result, it plans to keep rolling out more Saphyrs while launching new testing capabilities for the device so that it can analyze certain genetic diseases and blood disorders. It'll also be releasing new protocols for its sample preparation kits, which could spur some new sales.
Why it might be better to hold off on buying Bionano
As compelling as Bionano's business model and early signs of market traction are, it isn't a stock for the faint of heart. In the last three years, its shares have fallen by a brutal 57%, and in the last 12 months the damage clocks in at a drop of over 75%. Though setbacks have been few and far between, the truth of the matter is that it's a speculative company, making it not right for risk-averse investors.
NASDAQ: BNGO
Key Data Points
After all, Bionano is pioneering a piece of hardware that isn't necessarily something that there is a widespread, recognized need for within the biopharma world. Even if the company's claims about the Saphyr's capabilities being nonreplicable using other individual devices are entirely true, many laboratories are apt to continue using their existing hodgepodge of techniques and alternative systems to get the same data.
Likewise, even if it's true that the Saphyr is more time-efficient than manual techniques or other approaches, it might be a hard sell to potential customers who don't think that the system's time-saving capabilities matter that much in the scheme of their business.
In my view, Bionano probably will succeed with getting the Saphyr more widely distributed in the long run, and it'll likely make a ton of money while doing so. Though the convenience factor isn't going to be enough to drive wildfire-like sales growth forever, consistent investing in developing new tests and capabilities will likely lead to sources of new revenue from old customers. But its success could take quite a few years at its current rate of installing new systems, and it might underperform during much of that time.
Therefore, unless you're willing to speculate with a five- or six-year time horizon, you should probably pass on this stock. It isn't that the company's growth will stall; it's just that the initial traction the company has won will take quite some time to snowball to the point where the market will recognize its potential as a growth stock -- and it could even go down more in the meantime.
