Concerns regarding inflation and future interest rate hikes by the Federal Reserve have caused the Nasdaq Composite to dip 12% year to date. But since this is a market of stocks rather than a stock market, many stocks have been hit much harder than the broader index.
The genetic-diagnostics company Veracyte (VCYT -0.10%) is one such stock. Veracyte has plunged 36% year to date. But is the growth stock a buy for investors? Let's dig into Veracyte's fundamentals and valuation to answer that question.
Tremendous revenue growth in 2021
After a challenging year due to the COVID-19 pandemic, Veracyte emphatically rebounded in 2021.
As a backstory, Veracyte's total revenue fell 2.4% year over year in 2020 to $117.5 million. Product revenue from Veracyte's breast cancer prognostic test, called Prosigna, skyrocketed 966.6% to $9.8 million during the year. That's because the company's acquisition of Prosigna was completed in December 2019, which gave Veracyte a full year to record revenue from the acquisition.
But the company's genomic classifier test volumes (i.e., the Percepta lung cancer genomic sequencing classifier, the Afirma thyroid cancer GSC, and the Envisia idiopathic pulmonary fibrosis GSC) declined by 5.6% year over year in 2020. This was due to the healthcare industry's priority on diagnosing and treating COVID-19 patients, which led Veracyte's testing revenue to decline 5% year over year to $102 million in 2020.
The company's collaboration revenue was also down from $4 million in 2019 to zero in 2020 due to the fulfillment of development milestones in 2019. Finally, Veracyte's biopharmaceutical revenue dropped 29.9% year over year to $5.7 million in 2020.
Veracyte's total revenue soared 86.8% year over year to $219.5 million in 2021. Thanks to increasing COVID vaccination rates and a return to diagnostic testing, the company's testing volume increased 88.4% to 70,449 in 2021. This propelled its testing revenue 84.5% to $188.2 million in 2021.
Biopharmaceutical and other revenue surged 250.5% year over year to $19.9 million in 2021. For one, this was due to the $4 million of collaboration revenue from the fulfillment of obligations relating to development milestones under a Johnson & Johnson (JNJ 0.29%) diagnostic development agreement. Secondly, this includes revenue derived from Veracyte's acquisition of the immuno-oncology company HalioDx, which was completed last August.
Veracyte's strong revenue growth will continue although at a somewhat slower pace in 2022. But considering that the company's growth in 2021 was partially driven by pent-up demand for previously deferred testing services due to COVID, that's to be expected. Veracyte anticipates total midpoint revenue of $267.5 million in 2022, which is equivalent to 21.9% growth over 2021.
Looking out even further, analysts are predicting that Veracyte's total revenue will compound at a 20%-plus rate in 2023 to $325.7 million. This is due to the growing demand for the company's testing products.
Image source: Getty Images.
Enviable financial strength
Another attractive characteristic of Veracyte is that the company possesses a healthy balance sheet. The company boasted a cash and cash equivalents balance of $173.2 million at the end of 2021 against long-term debt of $1.1 million. This gives Veracyte plenty of capital to focus on carrying out clinical trials of its other tests and eventually bringing them to market.
Veracyte's pipeline of tests being developed for diseases such as lymphoma and rectal cancer should help to sustain revenue growth for the company beyond the next couple of years.
Veracyte offers robust growth at a cheap valuation
As a growth stock, Veracyte isn't consistently profitable yet. That's why I will use the price-to-sales-growth (P/SG) ratio to evaluate the stock's valuation rather than the price-to-earnings ratio.
Following Veracyte's stock plunge this year, Veracyte is trading at a forward price-to-sales ratio of 7.1 at the current $27 share price. Compared to the 20%-plus annual revenue growth that analysts expect the stock to generate for the foreseeable future, this is a P/SG ratio of just 0.3. For context, a P/SG ratio of less than 1 indicates that a growth stock could be a buy. At such a cheap valuation for its prospects, Veracyte is an even better buy for growth investors than it was just a few months ago.
