This year, Exact Sciences (EXAS -7.04%) expects its revenue will total just under $2.1 billion. That means that in just five years, its top line will have grown by an incredible 683%. The company has achieved significant growth over the years as its cancer screening tests have gained popularity. Unfortunately, the company's losses have been soaring during that span.
After a tough year in 2022, when its share price plunged more than 30%, has Exact Sciences become cheap enough that it's too good to pass up?
A couple of serious concerns investors shouldn't ignore
Exact Sciences is a cancer diagnostics company whose flagship product, the Cologuard test, is a non-invasive method for screening people for colorectal cancer. The company's tests can be vital tools in helping improve survival rates by detecting cancer in its early stages.
For 2022, Exact Sciences expects its growth rate to be about 25% when excluding the impact of COVID-19 testing revenue. And while that growth is impressive, the company has struggled to achieve profitability. Over the past four quarters, Exact Sciences's net losses have totaled $716.4 million. The 70%-plus gross margins it generates on revenue are encouraging, but with selling, general, and administrative expenses totaling $1.6 billion in the trailing 12 months, that is easily enough to send the company's financials deep into the red.
EXAS Revenue (Quarterly) data by YCharts.
An additional risk is that the company has been burning cash, with operating cash flow over the past 12 months at a negative $300 million.
For investors, that can be bad news because it means the company's operations aren't sustainable on a cash flow basis, and that raises the risk that the business needs to do a share offering or take on debt to help finance growth. But with nearly $670 million in cash and short-term investments on its books as of the end of September, the company isn't in dire need of raising more money just yet as it theoretically could have enough to sustain two-plus years at the current burn rate.
However, that also assumes that the company doesn't need any additional cash for acquisitions or growth initiatives. When adding in the company's capital expenditures, Exact Sciences's burn rate over the past year totals $501.1 million.
Exact Sciences' valuation has been plummeting
In 2022, shares of Exact Sciences fell 36%, underperforming the S&P 500, which declined by 19%. Exact Sciences isn't near its 52-week low of $29.27, but in terms of its price-to-sales ratio, the healthcare stock is trading at a low premium compared to historical valuations:
EXAS PS Ratio data by YCharts.
Under different market conditions, this valuation might entice some investors. However, the appetite for risk just isn't there in the current bear market, and investors have been shedding businesses that could be vulnerable to a slowdown in the economy and rising interest rates. But for investors willing to take on some risk, there could be an opportunity here.
Should you buy Exact Sciences' stock?
Exact Sciences isn't a stock I'd consider buying today. The company needs to significantly bring down its costs to prove that it can achieve growth without needing to invest heavily in sales and marketing efforts. Selling, general, and administrative expenses currently account for more than 80% of revenue, and that's simply too high, and that makes it too difficult for the business to have any hope of achieving a profit.
Until that percentage comes down to the point where profitability doesn't look like a long shot, this is a stock I would avoid. The risk is simply too great. There are safer and better growth stocks investors can buy for the long haul.
