Risk and reward are often correlated. Investing in stock entails risk, but it also offers the opportunity for investors to build wealth and purchasing power over time.
Part of the risk associated with owning stocks is that they can be quite volatile. For instance, the Nasdaq Composite has dipped roughly 30% in 2022. And the genomic-test maker Veracyte (VCYT -2.11%) has seen its stock plunge a whopping 60% during that time. For investors who are unfamiliar with the company, its products are used to diagnose cancer found in the breast, colon, lungs, and thyroid.
But is the small-cap stock a buy for growth investors? Here's a look at Veracyte's fundamentals and valuation to help investors decide for themselves.
Tremendous revenue growth continued in the second quarter
The California-based genetics-test company recorded $72.9 million in total revenue during the second quarter ended June 30. For context, this was 32.2% higher than total revenue in the year-ago period. What led to the company's impressive revenue growth rate?
Demand from healthcare providers for Veracyte's diagnostic tests remained high in the second quarter. This is because the company's Afirma thyroid genomic-sequencing classifier (GSC), Decipher prostate GSC, and Percepta lung cancer tests each help patients to avoid procedures that are costly and risky.
The tests also reduce the time to receive appropriate treatment for a patient's condition. This is how Veracyte's total test volume surged 19.4% higher to 24,904 for the quarter. The company's total testing revenue of $59.7 million followed suit, up 17.6% year over year.
Due to steady demand for Veracyte's ProSigna breast cancer test, the company's product revenue increased by 15.6% over the year-ago period to $3.1 million in the second quarter. Finally, Veracyte's biopharmaceutical and other revenue soared more than sixfold, to $10 million, during the quarter. This stems mostly from the acquisition of the immuno-oncology company known as HalioDx, which was completed in August last year.
Not resting on its laurels, Veracyte is strengthening its position in its industry. The company has a phase 3 clinical trial in progress for its companion diagnostic with AstraZeneca's Calquence to diagnose patients with untreated diffuse large-B cell lymphoma. This diagnostic test helps healthcare providers to determine whether Calquence and a combination of other drugs would be an appropriate treatment for patients. Veracyte's existing product portfolio and pipeline explain why analysts are expecting 26.7% total revenue growth in 2022 and 14.9% total revenue growth in 2023.
Image source: Getty Images.
The company is a financial fortress
As of June 30, the company had a cash and short-term investments balance of $164 million. Stacked up against $1.1 million in long-term debt, this is a net liquidity position of $162.9 million. Given Veracyte's $1.3 billion market capitalization, this net liquidity alone works out to nearly 13% of the company's current valuation.
Funding clinical trials and launches of new products is an expensive proposition. Fortunately, Veracyte appears to have the balance sheet necessary to do so.
A growth stock with a cheap valuation
As a company in the early innings of growth, Veracyte isn't a consistently profitable business. This is why the price-to-earnings (P/E) ratio is of no use and I prefer the price-to-sales (P/S) ratio to value the company.
Veracyte is trading at a trailing-12-month (TTM) P/S ratio of 4.8, which is significantly lower than its 10-year median TTM P/S ratio of 5.8. The company's fundamentals appear to be intact since it's expected to easily deliver double-digit annual total revenue growth this year and next. That's what makes the current $18 share price appear to be a bargain for this sizzling growth stock.
