Invitae (NVTA -72.22%) is a promising business specializing in genetic testing, which could be the wave of the future in healthcare. Genetic tests can uncover mutations or variants in your DNA, which can help prevent illnesses and treat them more effectively.
But while it's a good opportunity for investors, not every business in that space will be successful. Invitae, for instance, has been incurring significant losses and is a bit of a risky company to invest in.
Since the stock peaked in late 2020 and early 2021, when it was trading around $60, it has come crashing down. Now trading at less than $3, and with the excitement long gone, is it too late to buy this healthcare stock, or could it still be a good long-term investment?
The big risk investors need to be aware of
Investors who are thinking about buying Invitae need to be prepared to wait a long time for their investment to pay off. And I don't mean just a few years, or even five or six -- at least a decade. That's because the industry is really small, and it's not going to get a whole lot bigger for a while.
By 2027, analysts at Fortune Business Insights say, the entire U.S. genetic testing market will be worth just under $10.3 billion. While the industry has a compound annual growth rate (CAGR) of 13%, it still won't be terribly large in the near future.
By comparison, telehealth, another emerging area of healthcare, has a CAGR of 32%, and in 2020 the global market was worth $144 billion.
That means the big payoff from owning Invitae could take a long time. While investors cashed in during the hype of 2020 and 2021, when meme stocks and growth stocks like Invitae took off, that's not likely to happen again. And it's certainly not something investors should count on.
The danger is that by the time the industry starts to get much bigger, Invitae might not be a big player in it -- at least not if it keeps on its current trajectory.
Invitae is incurring some staggering losses
In the trailing 12 months, operating losses have totaled $797 million. Its revenue during that time has only been $520 million. The healthcare company has been spending heavily on research and development: $462 million, or nearly 90% of sales.
Invitae is on a dangerous pace, and with its share price down 77% over the past 12 months, it's clear that investors have lost their enthusiasm. So it will be more costly for the cash-burning company to raise money through a stock offering.
A lower share price means it will need to issue more shares than if the price were higher. That means more dilution, which, in turn, can lead to a lower stock price.
It may not be too late, but is it worth the risk?
The genetic testing market has long-term potential, but it's hard to know just how big it will end up being. And it's even less certain that Invitae will become a dominant player in it.
For the majority of investors, the risk is likely too high today. The company is burning through cash, and its mounting losses make this an incredibly chancy stock to buy right now.
Invitae has potential, but unless you have both a high risk tolerance and are willing to hold the stock for 10-plus years, you're better off looking at other growth stocks instead.
