Investing in turnaround stocks takes a special kind of investor. Bruised businesses are rarely at the top of the list of stocks that people want to buy, and pretty much every turnaround story is fraught with the risk of potentially fatal failure.
And those risks are looming large in Invitae's (NVTA -44.44%) case. Despite a decade of incredible revenue growth, the genetic testing business is being forced to severely slash its costs to avoid running out of money in the next couple of years. It's safe to say it won't be the same company by the time the cuts are done. In fact, it might not survive at all.
Could there still be any hope for Invitae stock? Let's take a look.
Cuts and changes might be for the best
For the uninitiated, Invitae offers genetic testing products that help people to understand their risks of developing different cancers, heart conditions, and various inherited conditions. With a global footprint of processing laboratories and local operations, it sells its testing packages to individuals as well as to healthcare businesses and clinics.
The problem is that even after a recent run-up due to its favorable earnings report on August 9, over the last five years its shares have fallen by 48%, and it has struggled to turn its consistent top-line growth into earnings.
On July 18, the company announced a major new restructuring initiative intended to shore up its margins. If the cost reductions go as planned, the company could achieve as much as $326 million in annual savings in 2023. To get to that sum, it'll cut staff and lab space, close down operations in certain international markets, and stop offering certain tests that are driving up its cost of goods sold (COGS). It'll still retain most of its testing products in oncology, rare disease, and women's health.
Making those changes will cost as much as $100 million, which is quite steep. However, after the cuts, it plans to use between $225 million and $275 million in cash in 2023, a sharp reduction from its $425 million it anticipates possibly using this year. That should give it the runway it needs to keep the lights on through 2024.
Finances will probably be tight for the next couple of years as management thinks the restructuring could take as long as 18 months to complete. Make no mistake, it'll be leaving revenue on the table as a result of the downsizing. Still, for an unprofitable company with $136.6 million in Q2, there isn't much choice if it wants to survive, so the transition could be a positive one for its long-term health.
Invitae is also shaking up its management team. CEO Sean George will depart, and its current COO Kenneth Knight will take his place as well as a seat on the board of directors. And one of the company's former CEOs and co-founders, Randy Scott, will reprise his former role as chairman of the board. Given the major operational changes management is setting out to accomplish over the next couple of years, it's probably a good thing that the cast of characters is shifting too.
The next few quarters will be precarious
After the restructuring period ends in the next 12 to 18 months, management is optimistic that Invitae can grow its revenue by 15% to 25% per year. That's a bit slow for growth stock territory, and it's also far enough in the future that investors should be skeptical.
More importantly, the lower boundary of that pace is close to its recent rate of growth, so it might not be maintainable with a smaller subset of products. And with more than $1.4 billion of its convertible senior notes outstanding as debt, it will have a hard time raising additional funding if its transition plan doesn't work out. Further cuts might be required, especially as cash starts to get tighter.
Nonetheless, there is a glimmer of hope thanks to fresh management. So while you probably shouldn't be buying Invitae stock unless you're willing to take long odds on the probability of its turnaround, it isn't entirely without hope. And if you're a contrarian or a specialist in investing in turnarounds, it might be up your alley. Just remember that you'll probably need to wait at least a few years for your shares to break even, assuming they ever do.
