Genomics was one of those "this will save us all" technologies -- following in the wake of humanized antibodies and preceding the current (but aging) frenzy over stem cells. Positioned as a facilitator of genetics research and drug development, Affymetrix
While the stock has recovered significantly from its lows, long-term investors saw another market thrashing Friday as the company disappointed the Street with its current results and outlook.
Total revenue for the quarter grew by only about 5%, with product revenue growing slightly faster at 6%. Margin performance was uninspiring, and operating income dipped 6% (although net income did climb 11% for the quarter). This miss, coupled with guidance that didn't please analysts and professional investors, sent the stock down more than 20% at one point on Friday.
This, in short, is why I don't like to buy stocks with really high P/Es. Not only does overpaying for a stock rob you of some of the future growth, but it also ups the risk factor significantly. Unfortunately, even with Friday's downdraft, Affymetrix still doesn't look like much of a bargain.
I'm sure I'll hear from at least one person who will say that valuation doesn't matter and that the promise of genomics is so great that Affymetrix would be a good buy today at any valuation. Sorry, but I don't buy that.
It's one thing to say that valuation doesn't matter when a company is still tiny and has all of its growth ahead of it (like Affymetrix in 1998), but it's another story entirely when that company is no longer doubling its revenue each year.
While I appreciate the "gee-whiz" aspects of Affymetrix's technology, it's not the only game in town. There are other systems that can perform genetic analysis from companies such as General Electric
Genomics and gene therapy will no doubt be looked back upon as major advances in human health and science, but it doesn't automatically follow that Affymetrix will ride that wave to megasuccess. While the company's GeneChip technology is the real deal, I'm not sold on the stock as a pick-and-shovel play for genomics at today's prices.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).