What happened
There's big news for Guardant Health (GH -5.19%) shareholders today -- but disappointing news also. This morning, analysts at investment bank Craig-Hallum announced a switch in their bets on cancer-screening biopsy companies, downgrading shares of Exact Sciences (EXAS -7.04%) from buy to hold -- and replacing them with a bet on Guardant Health -- initiated at buy.
Responding to the news, investors are selling off Exact Sciences stock by 6.5% today, as of 10:45 a.m. But here's the bad news: they're selling Guardant Health too -- it's down 5.5%.
So what's up with that?
So what
In twin notes reported by StreetInsider this morning, Craig-Hallum notes that the Guardant ECLIPSE Shield study is nearing a conclusion. If the results are good (i.e., if they prove Guardant's technology can successfully screen for colorectal cancer with a liquid biopsy), it could not only replace colonoscopies as a preferred screening tool but also create a strong competitor to Exact Sciences' own Cologuard franchise -- putting a lid on how high Exact Sciences' stock could go.
This would be good news for Guardant, bad news for Exact Sciences.
How good for Guardant, you ask?
According to Craig-Hallum, a successful trial result could "change how [cancer] is screened forever" -- not just colorectal cancer, but potentially many kinds of cancer. Although "this is not a risk-less trade," the analyst cautions, it could open the door to Guardant more than tripling its current annual revenues to $1.5 billion five years from now, and increasing them by "a multiple of that" 10 years from now.
Now what
But does this make Guardant Health stock a buy -- and Exact Sciences perhaps a sell? Here's how I look at it: Based on trailing-12-month sales, Exact Sciences currently costs three times the sales it's racked up over the last year. That's a whole lot cheaper than Guardant's P/S ratio of 12.5.
But what about Guardant's sales growth, you ask? Well, look out five years from now, as C-H is doing. Assuming Guardant hits $1.5 billion in sales five years from now, its current valuation of $4.5 billion is only 3x that number. That sounds a lot cheaper than Exact Sciences, right?
But here's the thing: Wall Street also has a sales forecast for Exact Sciences five years from now: $4.2 billion. And based on that estimate, Exact Sciences sells for less than one and a half times its fiscal 2027 forecast -- just half of Guardant's valuation!
Turns out, relative to Exact Sciences at least, Guardant isn't really as big a bargain as Craig-Hallum is making it out to be. If you ask me, the decision to swap out Exact Sciences for Guardant Health isn't nearly as clear-cut as Craig-Hallum makes it out to be.
