Well, it was fun while it lasted.
Meme-stock mania in August again swept through the public markets, and in a first, the frenzy reached the biotech stocks.
In fact, the mania was started by a biotech stock when genetic-testing platform Invitae (NVTA) improbably nearly quadrupled (up 277%) on Aug. 10. Many other short squeezes last month, including the headline-grabbing moves by Bed Bath & Beyond (BBBY), appear to have occurred latere.
Predictably, the excitement has dissipated nearly as quickly as it formed. Biotech stocks from Bionano Genomics (BNGO) to PacBio (PACB) have given up most or all of their meme-stock gains.
Can investors salvage any of these trendy genomics stocks to find long-term winners?
Sifting Through the Carnage
Many biotech stocks have seen crushing year-to-date declines. Investors who were hanging on for dear life might've been better off selling during the recent frenzy.
- Invitae about quadrupled from a closing price of $2.29 a share on Aug. 9 to a high of $9 on Aug. 10. It closed at $2.76 a share on Sept. 2. That's a difference of 21% from the pre-frenzy closing price.
- Bionano Genomics surged 92%, from a closing price of $2.26 on Aug. 9 to a high of $4.35 on Aug. 11. It closed at $2.31 a share on Sept. 2. That's a difference of 2% from the pre-frenzy closing price.
- PacBio more than doubled from a closing price of $6.66 on Aug. 9 to a high of $14.20 a share on Aug. 11. It closed at $5.32 a share on Sept. 2. That's a 20% drop from the pre-frenzy close.
- 10x Genomics (TXG) jumped 20% from a closing price of $44.94 a share on Aug. 9 to a high of $53.76 on Aug. 11. It closed at $30.76 on Sept. 2. That's a 22% decline from the pre-frenzy close.
Investors can argue that broad-market events in that time frame led to losses. But not much changed. At the Federal Reserve's Jackson Hole gathering, the central bank simply reiterated its stance from the July meeting, which was misinterpreted by Wall Street analysts who were too eager to price in a pivot.
What’s Ahead for These Genomics Stocks?
Investors shouldn't expect a quick turnaround in these genomics stocks.
No amount of buying from asset manager Cathie Wood or other investors is likely to translate to a durably higher valuation for these companies.
Perhaps it's more accurate to say macroeconomic headwinds are likely to overpower tailwinds from fleeting surges in emotional buyers.
- Invitae has firmly set expectations for investors through 2024, and there's not much to be excited about. Revenue in the second half of 2022 is expected to match revenue from the first half. Revenue isn't expected to grow at all in 2023. When revenue does begin growing again in 2024, management expects 20% year-over-year growth. That's hardly enough to lead to meaningful changes in profitability or operational efficiency. There are moves that could improve the chances for an acquisition, but investors may want to take a show-me approach.
- Bionano Genomics surged during the liquidity bubble of 2021. It's still overvalued. The average Wall Street analyst expects full-year 2023 revenue of $47 million, according to data compiled by Yahoo Finance. On the one hand, that would represent year-over-year growth of 78%. On the other hand, the company currently trades at over 14 times next year's revenue. That's pretty expensive in the current market, let alone in the market that's likely to exist one year from now.
- PacBio is a popular stock. But investors might need to abandon the top-down thesis based on terms like "innovation" and adopt a bottom-up thesis that incorporates the competitive landscape. The reality is that PacBio is sandwiched between a dominant peer in Illumina (ILMN) and an up-and-coming disruptor in Oxford Nanopore Technologies. ONTTF It has instruments sized similarly to the former and technology that's likely to be overrun by the latter. And it still lags on a key metric used to track success in DNA sequencing.
- 10x Genomics has an efficient business model built on selling wide-margin consumables required to operate the lab instruments it sells. But it also expects revenue growth to slow to a crawl at best in 2022. The business was oh-so-close to profitability, but the sudden slowdown suggests profitable operations won't be achieved anytime soon. That drastically changes how investors value the lab-hardware business.
The best-positioned genomics stock among those listed above is 10x Genomics, albeit with some asterisks. The business has announced layoffs to reduce expenses and conditioned investors to expect sharply lower full-year 2022 revenue.
If the company encounters additional hardship in the second half of this year, perhaps due to a rising U.S. dollar, then all bets might be off.
