Invitae (NVTA 13.51%) is a genetic testing company that's in its early growth stages, so shareholders should expect to take on some risk with a stock like this. But in Invitae's case, the company is burning through an excessive amount of money, and the risk could be too significant for investors to be willing to accept.
Is this a business that's in trouble and could run out of money? Or could it be a good long-term investment for growth investors to buy and hold?
The company's cash burn is concerning
A big problem with Invitae is that it is burning through lots of cash. Over the trailing 12 months, the company has used up $587 million in cash just from its day-to-day operating activities. Its investing activities have used up an additional $126 million during that stretch. With just $586 million in cash and marketable securities, Invitae doesn't have the room to absorb that level of cash outflow for long.
The good news, however, is that the business has been reducing its cash burn in recent quarters and sees more savings ahead. For 2022, its cash burn guidance is between $585 million and $625 million, which is less than its previous guidance of $600 million to $650 million. Last year, its cash burn was $849 million.
Why this might not be enough improvement
While Invitae has been improving its rate of burn, it's still using up lots of cash, and that can create problems for investors down the road. If a company doesn't generate enough revenue, it might be forced to issue shares to keep money coming in, resulting in significant dilution. And that's an issue that investors have already been dealing with since Invitae's share count has risen drastically in recent years.
A high rate of cash burn doesn't mean the company will go out of business, because as long as it can raise money from debt or issuing shares, it can keep its operations afloat. But with Invitae's share price collapsing 82% since the start of the year, a lower share price means that it would need to issue more shares to raise the same level of cash as would have been necessary at a higher price. This can create a nasty spiral for the company, because issuing shares can send the healthcare stock even lower.
Tread carefully with Invitae
Invitae isn't in danger of running out of money just yet. Even though its cash burn doesn't look great, it can raise money through the debt or equity markets to keep the business going. But that might not be very comforting to investors who have to worry about dilution and a stock that's in an endless tailspin.
There are some exciting growth opportunities in the area of genetic testing. But if Invitae can't improve its financials, it might not be able to realize its potential. This is a business that has incurred losses totaling more than $3.2 billion over the trailing 12 months and that looks to be nowhere near hitting breakeven anytime soon.
Invitae has significant growth potential, but it also comes with huge risk. Investors would likely be better off taking a wait-and-see approach with the stock. There's little reason to expect a big improvement in the company's financials in the near future, which could inevitably lead to a greater decline in its share price.