A defeated biotech stock that is finally attractive

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This lab hardware company is growing, making money and almost profitable.

Biotech stocks are stuck in a historic correction. That’s not news. What doesn’t get much discussion is that the correction was largely justified and far too late.

Throughout 2020 and 2021, investors were bombarded with hype from trendy thematic publicly traded funds and ephemeral social media celebrities. Combine that with stock prices that only seemed to move in one direction and a human brain geared to bias, and it became easy to think, “This time it could really be different.”

It was not. The correction shows that fundamentals still matter, drug development is difficult, and biotechnology is not technology.

It is significantly more difficult for a drug developer to earn a $10 billion market value compared to a software company. Valuations can go far above the prices suggested by fundamentals, but mitigating risks – developmental, regulatory and commercial milestones – ultimately drive prices.

While some adjusted biotech stocks are only closer to fair value, others are now starting to look attractive to investors with a long-term view.

10x Genomics TXG) – Get 10x Genomics Inc Class A Report is a quality growth stock that investors may want to become more familiar with as the macro environment deteriorates.

What does 10x Genomics do?

10x Genomics is a laboratory hardware provider that helps customers better understand the complexities of biology. It sells instruments and the disposables needed to make them work, which allow scientists to visualize biology in resolutions ranging from single cells to systems of millions of cells.

The company’s Chromium and Visium products are integrated into drug development workflows around the world. In fact, the company counts all of the top 100 global research institutions and all of the top 20 global biotech companies as customers.

Consumables rule everything around me

What makes 10x Genomics a high quality growth stock is the revenue mix.

It may be known for selling lab instruments, but its main source of income and profit is actually selling the disposable reagents needed to operate them. Think of it as a printer-and-ink or razor-blade business model. This revenue category, called consumables, is what sets premium lab hardware companies apart from the rest.

Take DNA sequencing leader Illumina ILMN) – Get an Illumina, Inc. Report as the perfect illustration. Investors may be most familiar with the sequencing tools it sells to customers around the world, but the company generated 81% of its sales from consumables in 2021. Illumina is in fact a supplier of chemicals.

Income mix is ​​one of the first metrics investors should refer to when researching a lab hardware company. Most don’t make it. California’s Pacific Biosciences PACB) – Get the report Pacific Biosciences of California, Inc. generates only 40% of its revenue from consumables. It reported an operating loss of $210 million for 2021. NanoString Technologies NSTG) – Get NanoString Technologies, Inc. Report generates 53% of its revenue from consumables. It reported an operating loss of $108 million for 2021.

Now consider 10x Genomics, which generated 85% of consumer goods revenues in 2021. It reported an operating loss of $52 million last year, but the shortfall stemmed primarily from continued investment in growth. The company generates nearly as much revenue every quarter as PacBio or NanoString in a year.

Investors will be reassured that 10x Genomics had a cash balance of $539 million at the end of March 2022 and will burn less than $100 million this year. It could probably be profitable if the macro environment required a downward spiral – or continued investing in growth as competitors retreat.

Why is 10x Genomics attractive?

To be blunt, shares of 10x Genomics were dragged into the wild speculation of 2021.

At its peak, the company was valued at nearly $20 billion and over 40 times sales, which was ridiculous. As a general reference, the best lab hardware and medical device companies are making the most of about 15 times their sales — and even that should raise some eyebrows.

The company is valued at about $5.5 billion and 9 times projected revenue in 2022, about six months after the biotech correction. Stocks can always fall further, especially when you consider that the stock market could fall further in the next 12 to 24 months.

But investors can’t worry about naming a bottom. Instead, investors should only worry about maintaining valuation discipline and investing in attractive opportunities.

After several years of trading at a ridiculous valuation, 10x Genomics stocks finally deserve some more attention from long-term investors.

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This story was originally published June 3, 2022 11:43 a.m.

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