Meme-stock mania may have left shares of Bionano Genomics (BNGO), but the lab hardware company still trades at a significant premium. A market cap of $580 million is pretty steep for a company that may only have $26 million of revenue in 2022 and less than $50 million of revenue in 2023.
Investors are nonetheless intrigued by the company's technology platform. Powered by the Saphyr instrument, Bionano Genomics offers tools and software for detecting large genetic variations that can often be missed with traditional DNA sequencing machines.
The technical potential is certainly there, and the business expects revenue growth to remain healthy in the near term. However, investors can use one simple metric to gauge the sustainability of any business in lab hardware. It suggests Bionano Genomics has a long road ahead.
It All Comes Down to the Revenue Mix
Lab hardware business models are similar to the razor and blade approach. The idea is to sell as many instruments as possible to customers, then sell them a continuous flow of reagents, cartridges, and plastic consumables that are required to operate the machine. Selling the instrument represents one-time revenue. Selling consumables represents a steady stream of recurring revenue over many years. Consumables are typically accompanied by sky-high margins to boot.
Historically speaking, lab hardware companies that achieve sustainable success generate at least two-thirds (67%) of total revenue from consumables. There's not a very long list of success stories. The current landscape includes 10x Genomics (TXG), Illumina (ILMN), and Oxford Nanopore Technologies which generate 85%, 71%, and more than 67% of revenue from consumables, respectively.
Other trendy stocks may capture the imaginations of investors from time to time, but caution is warranted for businesses that fail to reach the coveted 67% threshold. For example, PacBio (PACB) was also swept up in meme-stock mania during 2021, but it generated less than 40% of revenue from consumables in the first half of 2022.
How Does Bionano Genomics Fare?
Unfortunately, Bionano Genomics has among the lowest dependence on consumables revenue of any publicly-traded lab hardware company. In the first half of 2022 the business generated just 24% of sales from consumables.
This can be primarily explained by the company's immaturity. Bionano Genomics is relatively young and still seeding customer labs with Saphyr instruments. Growing the installed base of machines is a necessary first step to growing consumables revenue.
Although not surprising or necessarily discouraging (every company has to start somewhere), such a low dependence on consumables revenue does expose investors to increased volatility. That's especially true considering the company already trades at a steep valuation relative to sales.
Similarly, the high-margin revenue earned by consumables revenue is important for lab hardware companies eager to self-fund growth investments. Bionano Genomics reported both an operating loss and operating cash burn of nearly $60 million in the first half of 2022. It entered the second half of the year with less than $190 million in cash, which may only represent a runway through the end of 2023.
I give management a lot of credit for wisely raising capital when shares spiked during the meme-stock craze in 2021. Bionano Genomics made the unusual decision to announce multiple stock offerings only weeks apart. That was exactly the right thing to do for the business' long-term health. Other companies failed to take advantage of their overnight stock surges and are now paying the price.
Nonetheless, the business will need to raise additional capital during 2023 to extend its cash runway. That may prove difficult to do in the current environment, which suggests investors should brace for an unfavorable stock offering.
Bionano Genomics has a promising technology platform, but until consumables revenue begins dominating the revenue mix, investors should be cautious.
