Equity markets tend to be volatile and unpredictable over short periods of one year or less. But over five years or more, things change. Indexes usually show sustained growth the more one zooms out. Of course, that doesn't mean every stock delivers excellent returns -- some pull the market up, while others drag it down.
However, finding corporations in the former category and holding onto their shares for a long time can be one of the keys to increasing one's wealth on the stock market. With that said, let's look at one company that hasn't performed well over the trailing-12-month period but could deliver outsized returns in the next decade: Guardant Health (GH 1.11%).
What does Guardant Health do?
Guardant Health describes itself as a precision oncology company. It is an expert in developing liquid biopsies, tests that allow the detection of cancer cells from blood samples. Guardant Health's portfolio features several products that target various players in the cancer testing space. With its diagnostic solutions, Guardant helps screen for some cancers, guides physicians in choosing the best treatment options for their cancer patients, allows for recurrence monitoring in others, and helps pharmaceutical companies pick the best candidates for their clinical trials.
These solutions are incredibly valuable. For instance, helping drugmakers pick patients with the right clinical profile when designing studies for cancer programs can help speed up the otherwise slow drug development process and result in more effective therapies. That's before we mention that liquid biopsies are faster and less invasive than tissue biopsies. So, Guardant Health's services are in high demand, but the company does face stiff competition in this industry.
Its overall financial results have been decent, especially on the top line. However, the persistent net losses are one big reason investors have sold off the stock in the past year. In the second quarter, Guardant Health's revenue of $137.2 million increased by 26% year over year. On the bottom line, Guardant Health's adjusted net loss per share of $0.82 was better than the $1 loss it reported in the year-ago period.
The long-term view for Guardant Health
Cancer won't stop being a problem in the next decade. Things will almost certainly get even worse, given our aging population. So, there will only be a rising demand for Guardant's products. The company can deliver above-average returns throughout this period, provided it continues to increase its revenue at a good clip and substantially improve on the bottom line. As for revenue, the company sees a massive addressable market ahead.
For instance, it estimates the market for cancer residual testing to be worth more than $20 billion, while it sees a $10 billion opportunity in helping physicians choose the best therapy options. Guardant is unlikely to capture this $30 billion all by itself. However, it is a leader in liquid biopsies, and if it can grab even 10% of that total in the next decade, its top line should grow rapidly. For fiscal 2023, Guardant expects revenue to come in between $545 million and $550 million.
Taking the lower end of that projection and assuming an additional $3 billion in revenue in the next decade -- about $3.5 billion in 10 years, which amounts to a compound annual growth rate (CAGR) of 20.6% through this period. Guardant Health itself expects its top line to register a CAGR of more than 30% in the next five years.
But can it turn a profit? The good news is that its gross margins are pretty good, generally coming above 60%.
GH Gross Profit Margin data by YCharts.
The company also expects to break even on a cash flow basis by 2028. So, profitability is on Guardant Health's mind, and my view is that it should reach that milestone before the end of the current decade. Yes, that's still far away, and the company's stock performance could suffer if it fails to achieve its goal or ramp up its cancer testing across key categories. However, the potential upside is also significant.
That's why investors, especially those with a little more tolerance for risk, should strongly consider a position in this stock and staying put through 2033.
