It's no secret that growth stocks struggled mightily in 2022 amid high inflation and surging interest rates. This is at least partially why the Nasdaq Composite shed a third of its value last year.
And many growth stocks were hit even harder. Share prices of genetic testing company Veracyte (VCYT -0.10%) plummeted 42% in 2022. But with the stock already up 18% in 2023, sometimes all it takes for a quality stock to recover is a new year. Here's why I believe Veracyte is a no-brainer buy for growth investors.
Veracyte's top line is still quickly growing
In the practice of medicine, making accurate diagnoses is of the utmost importance. Misdiagnoses can lead to delays in appropriate treatment of a disease and sometimes result in a worsened prognosis. Veracyte's diagnostic tests for numerous conditions, including lung cancer, breast cancer, prostate cancer, and bladder cancer, help doctors to answer clinical questions and guide treatment decisions. The tests are effective and insurance companies are recognizing the level of quality. These are part of why the demand for Veracyte's diagnostic tests will likely grow with each passing year.
The diagnostics test maker's revenue shot up 25.2% year over year to $75.6 million for fiscal 2022's third quarter. The company's total revenue increase was predominantly driven by an uptick in testing revenue. This was due to favorable coverage decisions from three health insurers for the Decipher Prostate Genomic Classifier, which is used to help make treatment decisions for patients with prostate cancer. Four new contracts with insurers for the Afirma Genomic Sequencing Classifier for thyroid cancer also contributed to a 25.8% increase over the year-ago period in test volume to more than 26,000 tests. This explains how Veracyte's testing revenue surged 26.9% higher year over year to $64.6 million during the quarter.
As a result of its success in getting tests more widely covered by insurers, analysts are projecting the company will generate $291.3 million in revenue for 2022. For context, that would be a 32.7% year-over-year growth rate over 2021. And analysts anticipate that Veracyte will produce $329.6 million in revenue for 2023, a 13.1% growth rate over the estimate for 2022.
Veracyte also has a test for lymphoma and a test for renal cancer currently in development, and these additional revenue streams should also fuel double-digit revenue growth well beyond just 2022 and 2023.
Image source: Getty Images.
Veracyte has a respectable balance sheet
Veracyte will need adequate capital to launch its lymphoma and renal cancer tests in the near future. And fortunately, the company appears to have plenty of liquidity to do so.
As of Sept. 30, Veracyte's cash balance was $170.1 million. Compared to its total liabilities of $77.8 million during that time, the company still has $92.3 million in net cash on its balance sheet to fund growth projects and product launches. This is equivalent to nearly 5% of the company's $1.9 billion market capitalization.
There's still time to buy Veracyte stock
Even though Veracyte's stock got off to a hot start in 2023, it still looks like a buy for growth investors. Veracyte is not yet a profit-making business, so it can't be valued using standard metrics like the price-to-earnings ratio. Veracyte's forward price-sales ratio is approximately 5.8. For a company growing its revenue at a healthy clip, this is a reasonably enticing value. That is probably also why analysts have an average 12-month price target of $31, which equates to a 14% upside from the current $27 share price.
