The aim of growth investing is to build significant wealth. Targeting companies that are briskly growing revenue can be a lucrative approach to investing.
In the past five years, the genetic diagnostics company Veracyte (VCYT 0.83%) has produced cumulative total returns of 116% for shareholders. For context, that is materially higher than the 81% total returns of the Nasdaq Composite index during that time. But can the stock maintain this robust performance? Let's dig into Veracyte's fundamentals and valuation to arrive at a decision.
NASDAQ: VCYT
Key Data Points
Selling very helpful tests is paying off
Before a disease can potentially be treated, it must be properly diagnosed. Given the complexity of the human body and the numerous differential diagnoses that are often in play, arriving at an accurate diagnosis isn't always easy.
The good news is that as companies keep making progress in providing higher-quality tests to healthcare professionals, the task becomes a bit less challenging. Veracyte is one such company that is assisting healthcare workers with coming to the correct diagnosis. The company's tests use molecular analysis to diagnose ailments such as lung cancer, breast cancer, prostate cancer, thyroid cancer, and the serious lung disease, idiopathic pulmonary fibrosis.
How can we be sure that Veracyte's tests are a big aid to the healthcare system in eliminating unnecessary surgeries and inaccurate diagnoses? Well, the company's test volume soared 28% higher year over year to nearly 32,000 during the second quarter. If Veracyte's tests weren't helping the healthcare system to become more efficient, this blazing growth wouldn't be happening on the consistent basis that it has for years now. Thanks to this rapid test volume growth, total revenue surged 24% higher over the year-ago period to $90.3 million in the quarter.
Image source: Getty Images.
Turning a profit is a matter of when and not if
Veracyte's net loss narrowed to $8.4 million for the second quarter from $9.5 million a year earlier. Taking a slightly higher share count into consideration, the company's net loss per share improved from $0.13 during the year-ago period to $0.12 during the second quarter.
Veracyte should continue to make strides toward becoming profitable in the years ahead: The company presented 12 more abstracts for its diagnostic tests at prominent medical conferences in the second quarter. Doing these events on a regular basis will enhance the recognition and adoption of its tests by healthcare practitioners, which could fuel additional test volume growth. Veracyte also currently has a lymphoma subtyping test for AstraZeneca's Calquence in the works, which could eventually be a boost to its sales. Finally, the company's nCounter Analysis System helps healthcare professionals quickly translate discoveries into functional clinical insights. This could lead to further revenue growth as well.
For these reasons, analysts anticipate that Veracyte's net loss per share could narrow from an average estimate of $0.51 in 2023 to just $0.06 by 2025. That would put the company on course to become profitable in the second half of this decade.
The stock could be cheaply valued
After a 32% rise in its stock price during the past 12 months, shares of Veracyte arguably remain reasonably valued: The stock's price-to-book (P/B) ratio of 1.8 is still well below its 12-year median P/B ratio of 5.1. Considering how well Veracyte is executing as a business, this could translate into meaningful capital gains in the years to come.
Analysts have an average 12-month share price target of $34, which would be a solid upside from the recent share price of about $27. That is why Veracyte stock currently looks like a buy for growth investors.
