It's been a good start to the year for Cathie Wood's ARK Innovation ETF, which is up 36% thus far in 2023. The fund has benefited as growth stocks have been getting back into the good graces of investors thanks partly to excitement over artificial intelligence as well as hopes that interest rates may have peaked.
But one stock in this ETF that Wall Street analysts don't feel particularly bullish on right now is Exact Sciences (EXAS 0.10%). On average, they believe the stock has hit a peak as it is past many price targets. Should investors be concerned, and is this a reason to avoid the stock?
Exact's share price has risen 88% this year
Exact Sciences is in the business of cancer screening. Its Cologuard test is non-invasive and can help with the early detection of colorectal cancer. The company also has other tests as it hopes to help prevent cancer-related deaths.
Exact Sciences is coming off a record year in 2022 when sales topped $2.1 billion. Last year, it reached a milestone with its 10 millionth Cologuard test and cumulatively it has now screened 12 million people for cancer.
The business continues to grow, with Exact reporting revenue of $602 million for the first three months of 2023, which was up 24% year over year. It also raised the midpoint of its revenue guidance this year by $110 million. Plus, it anticipates that it will generate positive free cash flow this year, earlier than its previous forecast of 2024.
In light of the strong numbers, investors have been eagerly buying up the healthcare stock, which is now trading around its 52-week high.
Analysts believe the stock has plateaued
According to the consensus analyst price target of $87.65, shares of Exact have peaked, at least for the near term; analyst price targets are normally set for where they expect the stock to go over the next 12 months. Many analysts have been boosting their price targets for Exact's stock this year, but the majority of the targets are still below $100.
Has Exact's stock become too expensive?
Exact Sciences' stock isn't at all-time highs (it reached those in 2021), but with the shares at 7 times its trailing revenue, investors are paying a premium for the business.
EXAS PS Ratio data by YCharts
The risk with Exact Sciences is that the company remains unprofitable, with operating losses totaling $578 million over the trailing 12 months. Although its revenue has soared, the company is still nowhere near breaking even.
And while the company expects to generate free cash flow, investors should note that it also relies heavily on stock-based compensation, which totaled $207 million over the past year. If those expenses were paid out in cash, the company's rate of cash burn would have been much worse, making positive free cash flow likely unattainable this year.
Should you buy Exact's stock?
After falling 36% in 2022 and now off to a hot start this year, Exact Sciences has proven to be a very volatile investment. And with no path to profitability anytime soon, the roller-coaster ride could end up continuing for the foreseeable future.
Overall, I'm inclined to agree with analysts that this stock appears overvalued right now as there's not enough behind the company's recent performance to suggest that it is worth its current $17 billion market capitalization. While there may be some attractive long-term growth opportunities in the company's future, it still needs to be able to prove that it can post a profit, and it's nowhere near that point.
Unless you're willing to wait years for the business to hopefully improve its bottom line and you can be patient with the stock, you're better off avoiding it right now.
