The impressive performance of the stock market in 2020 and 2021 was powered by a liquidity bubble. If you still doubt that, then perhaps this article can change your mind.
Many biotech stocks reached irrational levels in post-pandemic boom. Investors may have thought they were paying a premium for innovation, but in reality, they were paying for revenue and earnings well into the future.
Worse yet, some of that financial performance may never actually arrive if growth slows or stalls. Trendy companies such as Ginkgo Bioworks (DNA) , Invitae (NVTA), Teladoc (TDOC), and others that were driven by momentum may take years to reclaim their 2021 highs.
Ginkgo Bioworks: A Smart Fundraising
What many investors may not realize is that synthetic biology powerhouse Ginkgo Bioworks was smart to take advantage of the exuberance in the market.
The SPAC through which Ginkgo went public assigned a $15 billion valuation to the company. But Chief Executive Jason Kelly and the team recognized that the figure was unsustainable and optimized the offering for the $1.6 billion in gross proceeds from the public debut on the New York Stock Exchange. That bounty can fund the business for many years, even with tech-stack-building acquisitions included.
Nonetheless, it's safe to say investors got a little carried away. Gingko Bioworks reached a peak valuation of more than $28 billion in November 2021. The shares today are valued at less than $5.5 billion.
To surpass the all-time-high valuation and earn a valuation of 5 times revenue, the business would need to increase core revenue 31 times compared with the high end of 2022 guidance. That's equivalent to growing revenue 50% a year for more than eight years -- and it doesn't consider the possible effects of share dilution if the company sells stock.
Invitae: Aggressive Growth Required
Many investors like to think Invitae represents the future of genetic testing. The reality could be far less impressive.
The company's core technology platform is tuned to detect cancerous mutations in what's known as germline screening, or hereditary mutations that are passed down from prior generations.
Most cancers arise from mutations that are acquired over an individual's lifetime, which requires what's known as somatic screening. That single nerdy detail suggests investors could have outlandish expectations.
The stock price suggests that, too. Invitae reached a peak valuation of more than $10.4 billion and $60 a share in January 2021. The shares now trade at less than $3 apiece including significant dilution. In other words, for the stock to reclaim its all-time high, the business would need to reach a valuation of more than $14 billion.
If the company is valued at five times revenue, then to reclaim the all-time high valuation, the business would need to grow revenue by 4.4 times from the high end of 2022 guidance.
That's a number management is relatively confident in hitting later this decade. But it depends on significant revenue growth from liquid biopsy tools and growing total revenue at nearly 40% a year for the foreseeable future.
Teladoc: Call the Doctor
We were all supposed to be using telemedicine by now, right?
Well, those futuristic declarations overlooked one simple fact: Health care is largely based on trust. Many patients simply prefer to have face-to-face visits with physicians, while physicians often prefer to see patients sitting in front of them rather than through even digitally smooth video and audio.
Further, in-person monitoring is required for many chronic conditions, or performing just about all diagnostic checkups like blood draws.
And while the pandemic prohibited most in-person health care, it has eased, and people are more comfortable again visiting their providers' offices.
Telehealth has a role in the future of health care, but investors may need to ground their expectations.
Teladoc reached a peak valuation exceeding $42.4 billion and $294 a share in February 2021. The shares now trade at roughly $40 apiece due to a significant slowdown in revenue growth.
If the business is valued at three times revenue, it would need to grow sales by 5.6 times to reclaim its all-time high valuation. That's equivalent to growing revenue at 25% a year for nearly eight years.
