If you've only recently learned about Invitae (NVTA -94.44%), you can consider yourself lucky. A few years ago, the diagnostics business wowed Wall Street with plans to bring genetic testing to the masses. Investors convinced it would become a leading provider of genetic testing pushed its market cap to a peak above $10 billion.
Invitae's plans captivated growth stock investors when interest rates were near zero and fresh capital was easy to find. Now that interest rates have risen, the market is increasingly focused on Invitae's bottom line, which remains deep in red territory.
Now, Invitae's market cap has fallen to just $352 million. But the stock could produce enormous gains for new investors if it regains just a fraction of its former glory.
What the bulls say about Invitae
Invitae's mission is to bring genetic information into mainstream medical practice, and plenty of deep-pocketed pharmaceutical companies are on board. Hardly a month goes by without the Food and Drug Administration (FDA) approving new treatment options for cancer and other serious diseases that are designed to work for a genetically defined population.
Popular culture makes applying genetic information in clinical settings sound much simpler than it is in reality. However, now that the costs of gene sequencing are so low, biologists are constantly uncovering new genetic mutations and variants. Invitae excels at detecting variants and classifying them as benign, which prevents unnecessary procedures. Invitae is also good at discerning which variants are dangerous, which helps with early detection.
Despite Invitae's steep stock price declines in 2021 and 2022, Cathie Wood's investment firm, Ark Invest, has purchased millions of shares of it for the Ark Innovation ETF this year without selling the stock once. Ark Invest thinks the market for molecular cancer diagnostics will grow from around $5 billion last year to $24 billion in 2030.
Wood is interested in more than just companion diagnostics for cancer drugs. Invitae's ability to interpret new gene variants could make it a vital partner for healthcare providers that want to improve early detection and disease prevention practices.
Finally, Invitae has proven it can grow its business. In 2022, Invitae generated 1.29 million billable units, which was 96% more than it reported in 2020.
Why most of Wall Street is less optimistic
When the benchmark federal funds interest rate was near zero, Invitae was more concerned with growing the popularity of its diagnostic platform than with making ends meet. About a year ago, though, it started realigning its business to focus on profitability. Most of Wall Street hasn't been impressed with its progress to date, and it's easy to see why.
NVTA Revenue (TTM) data by YCharts.
Invitae has reduced its workforce from a peak of 3,000 down to 1,700 in order to realign its operations around those that were most profitable. Despite its cost-cutting efforts, the company's losses are still more than a little upsetting. It lost $3.1 billion over the last 12 months.
Citing those heavy losses, Goldman Sachs recently maintained its sell rating on Invitae stock. The investment bank also lowered its 12-month price target to $1 per share, which implies a 26% decline from recent prices.
Image source: Getty Images.
Not yet
Diagnostics stocks are generally risky because health systems will almost always choose whichever test provider undercuts its peers. Invitae has had more than enough time to show investors that its fancy variant detection technology provides enough value to give it some pricing power. A paltry gross margin of just 24% in the first quarter was a sharp improvement, but hardly a sign this 13-year-old company is finally going to achieve scale.
Invitae's operating loss contracted by 18% year over year in the first quarter. That was a step in the right direction, but this business would need to take several much larger steps before I would consider buying more shares. I'm not closing my relatively small position, but I'm not adding to it until the company can make ends meet.
