Celebrated maverick investor Cathie Wood is certainly a divisive figure when it comes to the capital markets. While Wood's outsized bets on companies with innovative and disruptive technologies have earned her a legion of enthusiastic followers, naysayers argue that her momentum-driven stock-picking strategy is too volatile.
Both camps just might have a point. While Wood's flagship fund - the ARK Innovation ETF (ARKK) - rallied remarkably in 2020, with a return of 153.2%, it could not sustain this performance after the pandemic. ARKK fell 23% in 2021, and gave up roughly two-thirds of its value in 2022.
So far in 2023, the ARKK fund is up 25.6%; however, that lags the 35.3% YTD gain in another widely followed tech-focused fund, the Nasdaq QQQ Invesco ETF (QQQ), as Wood has notoriously pared her stake in standout chip stock Nvidia (NVDA) this year.
ARKK's top five holdings are all positive so far in 2023, but the performance has varied widely. Tesla (TSLA), which happens to be the largest fund holding, has more than doubled this year, as has Coinbase (COIN). Pandemic darling Zoom (ZM), meanwhile, is up less than 3% in 2023.
In this piece, however, we'll look beyond the top ARKK holdings to discuss a lesser-known Cathie Wood pick, and why it remains a “Buy” at current levels.
About Exact Sciences
Founded in 1995, Exact Sciences (EXAS) is a molecular diagnostics company that develops and markets non-invasive tests for the early detection of cancer. The company's flagship product is Cologuard, a non-invasive DNA test that detects colorectal cancer (CRC), the second leading cause of cancer death in the United States.
Currently, Cathie Wood's flagship fund holds 3.38 million shares of Exact Sciences. The stock is ARKK's 12th largest holding by weight at 3.38%, and the stake is currently valued at about $230.6 million.
Exact Sciences commands a market cap of $12.32 billion and its shares are up 32.6% on a YTD basis - outperforming ARKK, and just a few percentage points behind the broader QQQ.
Notably, at over 9%, EXAS is also the top holding in Wood's ARK Genomic Revolution ETF (ARKG). Shares of that fund are off 5% for the calendar year, pressured by weakness in top holdings like Teladoc Health (TDOC) and Intellia Therapeutics (NTLA).
Strong Financials
Exact Sciences' latest quarterly earnings results were impressive, highlighted by increased revenues and narrower losses, along with debt reduction and cash flow growth. The company reported revenues of $622.1 million, up 19.3% from the previous year, with core screening revenues rising 31% to $462.8 million. EXAS has reported revenue growth in each of the past four quarters.
The quarterly loss of $0.45 per share was considerably improved from a loss of $0.94 per share in the year-ago period, and surpassed the consensus estimate for a loss of $0.47 per share. In fact, the company's losses have come in narrower than the consensus estimate in each of the past five quarters.
Along with removing total long-term debt from its balance sheet, cash flow generation at Exact Sciences also improved from the past year. The company's net cash flow from operations swung to a $100.4 million inflow in the quarter ended June 30, from an outflow of $60.9 million in the same period last year. Moreover, Exact Sciences reported a free cash flow of $65.7 million in the quarter, compared to an outflow of $124.2 million in the year-ago period.
The diagnostics company also raised its revenue guidance for the year to a range of $2.441 billion to $2.466 billion, up from the previous range of $2.38 billion-$2.42 billion.
Cologuard Drivers
Exact Sciences' flagship product, Cologuard, has strengthened its market foothold to the point where it's nearly synonymous with colorectal cancer screening in the U.S. However, on its latest earnings call, the company revealed that more than 9,000 healthcare professionals ordered Cologuard for the first time in the quarter - taking its total to more than 321,000 orders since its launch. Further, 75% of all U.S. primary care physicians in the United States have ordered Cologuard, reiterating its widespread acceptance among the medical community.
However, not to rest on its laurels, the company is aiming to improve upon the current version of Cologuard with its next-gen version. This “Cologuard 2.0” is expected to reduce false positives by 30%, and at the same time, will cost 5% lower than the original version.
Given Cologuard's existing prevalence among medical professionals, its improved future iterations are expected to result in enhanced revenues and profitability for Exact Sciences for years to come.
Analysts Are Upbeat
In terms of earnings, analysts are optimistic that Exact Sciences will continue its trend of narrower year-over-year losses. For the current quarter, bottom-line growth is pegged at 45.2%, and for FY 23, the consensus is for a 46.3% improvement.
Overall, analysts remain bullish on EXAS, with a consensus “Strong Buy” rating for the stock and a mean target price of $108.27. This indicates a substantial upside potential of about 65.2% from current levels. Out of 17 analysts covering the stock, 13 have a “Strong Buy” and 4 have a “Hold” rating.
