Exact Sciences (EXAS 0.10%) is a testing company that aims to help detect cancer at its early stages, improving outcomes for patients. The business has been booming, with sales soaring from less than $880 million in 2019 to more than $2 billion this past year.
And there's still more growth on the horizon for the business. Here's what I expect from the company over the next five years -- and my view on whether it makes for a good investment to buy and hold today.
The business will likely keep growing
Today, a lot of Exact Sciences' business centers around its flagship product, Cologuard. It's a test that helps screen for colon and rectal cancer, and is a main source of revenue for its screening business. In Exact's most recent quarter, for the period ended June 30, screening revenue totaled $462.8 million in sales and accounted for close to three-quarters of the top line ($622.1 million). It also rose 31% year over year.
The remaining revenue for Exact came predominantly from its precision oncology segment, which features tests that help determine which cancer treatments may be optimal for a patient. At $157.2 million in revenue, it rose at a more modest rate of 2%.
But Exact isn't running out of growth opportunities. What may be most promising for the company is if it can bring a multi-cancer early detection (MCED) test to market. Exact is working on an MCED test, even in areas where there are no recommended screening options. With early detection being key for effective cancer treatment and cancer being one of the leading causes of death in the U.S., there could be significant demand for an MCED test.
It may be a bit optimistic to expect that Exact will bring one to market within the next five years, but it's something investors should keep an eye on nonetheless as progress on that front could make the stock a hot buy.
However, it wouldn't be surprising to see the company develop more tests in the meantime, or simply grow its market share. In addition to Cologuard, Exact has an Oncotype DX test for breast cancer, which aims to predict the likelihood that the cancer will spread to other parts of the body. According to the company, it's now the standard of care, and is used in treatment guidelines.
Through more testing and greater use of its existing tests, Exact could continue to generate significant revenue growth. One of the problems over the years is that the company's impressive growth rate has slowed significantly in recent periods.
EXAS Revenue (Quarterly YoY Growth) data by YCharts
A high growth rate is difficult to sustain, but as Exact develops more tests, it could improve in the future. However, simply maintaining a growth rate of around 20% could be enough to attract growth investors.
Will the company become profitable?
Perhaps the biggest question for investors is whether Exact will get anywhere near breakeven. A challenge for a growing business is that it often needs to spend more to develop its business, and the testing company is no exception.
Exact has struggled with staying out of the red, and that's unfortunately something I don't expect will change unless the company achieves significant revenue growth or slashes expenses. But with selling, general and administrative expenses totaling $414.5 million last quarter and accounting for more than two-thirds of revenue, it won't be an easy task.
EXAS Net Income (Quarterly) data by YCharts
The company is also spending heavily on research and development, with those costs adding another $104.1 million in expense during the period. Even though Exact has come close to breakeven in the past, spending could increase as the company invests more into its operations. For a growth-oriented business, investors shouldn't be surprised if Exact remains unprofitable for a while longer.
Should you buy Exact Sciences stock?
Exact Sciences has been a hot buy this year, rising 72% thus far. But as with many growth stocks, investors need to expect volatility. In 2022, when investors appeared to be hesitant to invest in unprofitable businesses amid macroeconomic concerns, shares of Exact fell by 36%.
Given that the business remains unprofitable and that it may stay that way for the foreseeable future, investors should brace for and expect volatility. There is a lot of promise and potential about Exact's business model given the need to treat cancer early. But it may take years before the business becomes profitable on a consistent basis.
If you're willing to take on the uncertainty and are OK with volatility, Exact Sciences could make for a good long-term investment. At a market capitalization of $15 billion, there's also the potential that a larger healthcare company ends up acquiring it given the long-term opportunities that the business possesses.
