Last year, shares of molecular diagnostics company Exact Sciences (EXAS +0.00%) dropped by about 40%. However, 2023 is proving to be very different, at least so far. Exact Sciences is up by 32% since the year started. There is no question that's an impressive performance, but it hardly constitutes a reason to invest.
Short-term gains are great, but can the company deliver market-beating returns over the long run? In my view, the answer is a resounding yes. Let's consider why it's worth buying shares of Exact Sciences today.
Why is Exact Sciences soaring right now?
Exact Sciences makes money by selling various cancer diagnostics tests. The company has yet to release its fourth quarter update, but on Jan. 8, it announced preliminary results for Q4. This sneak peek into Exact Sciences' upcoming update was to investors' liking, which explains why its shares recently soared. Exact Sciences expects revenue between $550.7 million and $552.7 million for Q4.
Not only would that represent an increase of 16% year over year (at the low range of its estimates), it would come in much higher than the average analyst estimate of $519.94 million. There is even more to the story. Exact Sciences has been selling COVID-19 diagnostic tests for the past couple of years, but revenue associated with these products has been inconsistent for obvious reasons. Excluding COVID-19 testing revenue, Exact Sciences' revenue would increase by about 28% year over year.
That means the company's core business is healthy and growing rapidly, while its COVID-19 testing revenue is set to drop by 87% year over year in Q4. For its fiscal 2022 year, Exact Sciences has guided for revenue between $2.082 billion and $2.084 billion, representing an increase of 18% year over year (or 25% excluding COVID revenue) and higher than analysts' average estimate of $2.05 billion.
These preliminary results are encouraging and so are Exact Sciences' opportunities within its exciting market.
NASDAQ: EXAS
Key Data Points
The long-term view
One of the best things about Exact Sciences' business is that, like others in the healthcare industry, the company's products help save lives by combatting one of the deadliest diseases, cancer. And there is plenty of work remaining in this area. The company is perhaps best known for Cologuard, a colorectal cancer test designed for people at average risk of the disease -- those with no family history of colorectal cancer or some other factor that makes them more at risk of developing this illness.
Although it is highly treatable when it is diagnosed early, with a five-year survival rate of 91% when caught at the localized stage (before it metastasizes), it continues to be one of the leading causes of cancer deaths in the U.S., with 53,000 annual victims. According to Exact Sciences, more than 60 million eligible people between 45 and 85 remain unscreened.
If the company can make headway within this population, it will help it increase its revenue while meaningfully helping decrease colorectal cancer-related deaths. Exact Sciences' next-generation version of Cologuard, which it is currently working on, could help further improve the test sensitivity (the percentage of true positives) and specificity (the ratio of true negatives) of the test.
But there is more to Exact Sciences' platform than Cologuard. The company helps patients and physicians with its Oncotype DX tests, which estimate the probability of recurrence in patients with various types of cancer and whether they will benefit from specific treatments. Here too, the lifesaving benefits of Exact Sciences' diagnostics solutions are obvious.
These and other products the company is working on (or already markets) will become even more important in the coming decade and beyond, given an aging population that will become more prone to such diseases as cancer.
This unfortunate reality does, however, mean a growing market ahead for Exact Sciences. Although the company's revenue growth slowed last year, it has been (mostly) northbound for a decade. Expect that to continue from here on out.
EXAS Revenue (Quarterly) data by YCharts.
And while Exact Sciences isn't profitable yet, the company now plans on reaching that goal on an earnings before interests, taxes, depreciation, and amortization (EBITDA) basis by Q3 2023, ahead of its previous estimate of 2024. Being profitable on an EBITDA basis isn't the same as simply being profitable, but the fact that the company is set to achieve this small step on the way to true profitability ahead of its original estimates is an excellent sign.
In my view, Exact Sciences will turn green on the bottom line before this decade ends. Strong revenue growth and gross margins above 70% from a business focused on saving lives all spell excellent news for Exact Sciences' future. Investors who get on board today should benefit from solid returns in the next 10 years.
