Could Another Short Squeeze Be on the Way for Invitae?

What goes up, can (and often does) come down. Invitae (NVTA -82.35%) stock is a case in point.

On Aug. 10, shares of the medical genetics company skyrocketed by nearly 247% after Invitae reported better-than-expected second-quarter results. But the very next day, the stock crashed. Invitae has now given up roughly 60% of its big gain.

These gyrations were a textbook example of a short squeeze. Invitae's shares took off as short-sellers rushed to cover their positions after the company announced positive news. This kind of momentum is rarely sustainable, though, as we saw with the stock's subsequent plunge.

However, don't discount the possibility of a rebound. Could another short squeeze be on the way for Invitae?

Necessary ingredients

There are really only two ingredients in the recipe for making a short squeeze. First, there must be a significant short interest in the stock. Second, there needs to be a positive development for the stock that spurs short-sellers to close their positions.

Unfortunately, we don't yet know the short interest for Invitae after the stock's gyrations a couple of weeks ago. The latest short interest data isn't scheduled to be published until Aug. 24.

All we know for sure is that nearly 51.8 million shares of Invitae were sold short as of July 29. This amounted to 25.7% of the stock float and 22.6% of outstanding shares. Those numbers will almost certainly be lower when the next short interest report is available. However, there's no way to be certain just how much lower they'll be.

What about the prospects for positive news for Invitae? That's always a possibility. However, keep in mind that the company's Q2 update didn't provide much reason to expect any immediate catalysts.

Invitae maintained its full-year 2022 revenue guidance for low-double-digit growth. The company also stuck with its previous cash-burn guidance for the year of between $600 million and $650 million.

Management did say that Invitae's 2022 adjusted gross margins should increase over the next two quarters to between 42% and 43%. But Wall Street is almost certainly already baking this improvement into earnings estimates for Q3 and full-year 2022.

The future is looking brighter

On the other hand, Invitae's longer-term future is looking brighter. The company stated that it expects revenue growth to return to a range of 15% to 25% beyond 2023. That's more in line with what investors like than the company's recent performance.

Importantly, there's a clear and compelling reason to believe that the confidence of Invitae's management is warranted. Earlier this month, the National Comprehensive Cancer Network (NCCN) updated its guidelines for colorectal cancer testing.

NCСN now recommends that genetic testing be given to everyone with colorectal cancer under the age of 50. It also recommends that this testing be considered for all individuals -- especially those with a family history of colorectal cancer.

This is a huge win for Invitae. CEO Ken Knight said on the company's Q2 conference call: "Based on this development, we estimate that in the U.S. alone, the colorectal cancer germ-line testing patient population will more than double."

More good news could be coming down the road, too. Knight noted that there are other studies underway that could lead to similar guideline changes for breast, prostate, and lung cancer. These indications have even larger patient populations than colorectal cancer does.

Odds of another short squeeze?

Wall Street analysts are becoming more bullish about Invitae. In July, one analyst surveyed by Refinitiv rated the stock as underperform, with four analysts recommending holding the stock. In August, there were no analysts rating Invitae as an underperform and only one recommending holding the stock.

Short-sellers definitely are big risk-takers. However, most of them usually aren't foolhardy. The new NCСN guidelines change the dynamics for Invitae; I think the odds of another short squeeze have dwindled considerably. Invitae's shares could move higher -- but don't look for a spike like we saw a couple of weeks ago.