Prudent investors have long known that health care spending will rise steadily regardless of the direction the economy as a whole is heading. It’s considered a defensive sector, but still contains stocks that can shoot through the roof under the right circumstances.
This year the stars aligned GeneDx Holdings (NASDAQ: WGS)a genetic testing specialist. The stock rose as much as 6,070% during the twelve-month period ending November 13. To put these gains into perspective: NvidiaThe legendary run of the past five years yielded a return of just 2,700%.
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Naturally, ordinary investors want to know whether genetic testing stocks can rise even further. Let’s take a look at the reasons why it has risen so far to find out if it deserves a spot in your portfolio.
In 2022, Sema4 acquired GeneDx, then a wholly owned subsidiary of Opko Health. Sema4 used artificial intelligence (AI) applications to build models of human health, and the addition of GeneDx’s genome and exome sequencing operation kicked the company into high gear.
When pediatric patients present with developmental disabilities, autism, or unexplained epilepsy, performing genetic testing to find out what the problem is becomes a standard practice. GeneDx can sequence a patient’s genome, which is a complete set of their genetic information. It can also sequence the much smaller part of the genome that codes for proteins, called the exome.
GeneDx recently reported third-quarter revenue that grew 44% year over year to $76.9 billion. Investors were happy to hear that the company’s new genome and exome sequencing operation is lucrative and now accounts for 78% of total revenue. Adjusted gross margin increased to 64.4% in the third quarter, compared to 50.7% in the prior year period.
GeneDx is still losing money under generally accepted accounting principles (GAAP). However, after adjusting for stock-based compensation, depreciation and other non-cash expenses, the company earned an adjusted $1.2 million in the third quarter.
When reporting third-quarter results, management raised the midpoint of full-year revenue guidance to $287 million. A few months earlier, the company forecast $260 million. In response to the increase in guidelines, Wells Fargo raised its price target for GeneDx from $34 to $75 per share.
Wells Fargo raised its price target but maintained an equal weight on the stock due to its steep valuation. The stock traded at about 7.5 times 2024 sales expectations. By comparison, America’s largest diagnostic companies, Quest diagnostics And LabCorpexchange for less than twice sales after twelve months.
GeneDx is now successful as the company shifted its commercial focus to pediatric neurologists in 2023. This niche could provide more growth in the coming years as the company is just scratching the surface. According to GeneDx, sales have only reached 12% of U.S. pediatric neurologists.
GeneDx says it has an 80% share of the US exome sequencing market. Newborn screening represents a $10 billion per year opportunity, and it’s not the only market for the company. If GeneDx remains the market leader in exome sequencing for a few more years, it could deliver huge profits despite a steep valuation right now.
Before adding shares of GeneDx to a portfolio, it’s important to realize that the diagnostics industry is fiercely competitive. Marketing exome sequencing to pediatric neurologists is now generating some profit. Unfortunately, it’s only a matter of time before a slew of competitors enter the niche with competitive pricing.
You don’t have enough fingers and toes to count all the potential exome sequencing providers who have noticed GeneDx’s recent success. With this in mind, it’s probably best to view this stock from a safe distance.
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Wells Fargo is an advertising partner of Motley Fool Money. Cory Renauer has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Quest Diagnostics. The Motley Fool has a disclosure policy.
Meet the Healthcare Stock That Delivered Nvidia-sized Gains in Less Than a Year Originally published by The Motley Fool
