Is 23andMe Stock a Buy?

DNA is an important building block in our lives, and 23andMe Holding Co (NASDAQ:ME) hopes to become the leader in genetic testing and therapeutics. Our genes hold clues to who we are, and genetics play an increasing role in determining our overall physical and mental health.

But that future could be decades away, so 23andMe proved to be somewhat of a stale investment since its initial public offering (IPO).

Although the potential therapeutic uses are limited, 23andMe sells DNA testing kits to consumers with a wide array of tests available to upsell. It continues gaining approval from the Food and Drug Administration (FDA) for direct-to-consumer marketing of its tests for various afflictions.

Everything from our ancestry to forensics and more can be discovered using genetic testing. However, there are potential privacy concerns to consider too. Think about the privacy concerns you’ve heard about regarding Meta (NASDAQ:FB) having access to your online behavior and now imagine a company having access to the building blocks that made you on a sub-cellular level.

Investors could be in for a big win should 23andMe find a way to lead this future, but so far the company has failed to excite them. One primary obstacle is the competitive market: it is brutal and there are plenty of regulatory hurdles. Let’s check 23andMe’s DNA to determine if it’ll match investors with profits.

23andMe Business Model: A Moving Target

23andMe first gained buzz among consumers for its at-home saliva tests. The Sunnyvale, California-based biotechnology company was founded in 2006 by Linda Avey, Paul Cusenza, and CEO Anne Wojcicki with a direct-to-consumer model.

While it raised visibility through venture capital-funded marketing, the company quickly found itself targeted by the FDA, along with state regulators in California and New York. It briefly halted marketing of its test in the U.S. while figuring out regulatory compliance.

What you actually get for your genetic test can vary widely depending on when exactly you bought your 23andMe kit. The ME business model has changed several times over the years, and the firm’s marketing strategy was modified to comply with government regulations. The company is expanding into genetic research and treatments to unlock individualized primary care.

Acquisitions like Lemonaid Health in November 2021 showed this movement. And it partnered with pharmaceutical giant GlaxoSmithKline (NYSE:GSK) on a drug-development collaboration in exchange for a $300 million investment in equity.

Accuracy of DNA Tests

The U.S. genetic testing market is estimated to reach $10.29 billion by 2027 with a CAGR of 13 percent. These tests can potentially match you with family, find ancestors, determine ethnicity, and predict genetic traits, like eye color. It can also identify potential health concerns based on genetics.

While popular, experts warn that there are issues. For starters, only a small portion of health problems we face are caused by genetic disorders but still the company is making data-based estimates on a lot of its information. Nevertheless, kits are FDA approved to detect over 30 autosomal recessive disorders like cystic fibrosis and sickle cell anemia.

There’s also the risk of the data being stolen or sold, much less given to law enforcement. Governments have, for a long time, tapped into these DNA databases. They use the data in a wide variety of application, including forensics to solve crimes. Balancing those benefits with the cost to personal freedoms is a fine tight wire walk.

Still, over 30 million people have taken an at-home test as of 2020, and that number only grew since. Much of that is attributed to the marketing from 23andMe and its biggest competitor Ancestry.com.

23AndMe CEO, Anne Wojcicki Is Silicon Valley Elite

The SPAC merger with billionaire Richard Branson’s Virgin Group brought 23andMe public in 2021 and made Wojcicki a billionaire in the process. She owned 99.4 million shares when the company went public, although she was already intimately familiar with wealth.

Wojcicki married Alphabet (NASDAQ:GOOGL) co-founder Sergey Brin from 2007 to 2015, the same year 23andMe secured its FDA approval. 

Her sister Susan Wojcicki was also part of Google’s founding team before becoming CEO of YouTube. But these familial ties only took her so far – Wojcicki’s success with 23andMe demanded her renowned intellect and command of both the health and tech sectors.

23andMe Financial Summary

By the middle of its 2022 fiscal year, 23andMe reported 11.9 million genotyped customers. This company generated $114 million in total revenue for the first half of the fiscal year. However, it also had $147 million in operating expenses, driven primarily by research and development and marketing costs.

This produced a net loss of $59 million, compared to a $72 million loss in the first half of the prior fiscal year. The Lemonaid Health acquisition will contribute to the top line long-term but hurt the cash war chest in the short-term.

Excluding that purchase, full year revenue for fiscal 2022 is expected to land around $260 million, with a net loss over $210 million. The long-term benefits could be great, but it has some obstacles to overcome in the short term.

23andMe Profitability Challenges Persis

Expanding in healthcare is neither easy nor cheap, and 23andMe is now a telemedicine and pharmaceutical company. This means the company faces strict regulations and a lot of expensive operational hurdles.

And it’s not profitable yet, so investors may be holding for a long time before it finally achieves its goals and ME share price follows. 23andMe at least has the FDA approvals under its belt, unlike rival Ancestry.com.

Of course, 23andMe has larger plans and is more likely to compete with the likes of Teladoc (NYSE:TDOC) in the decades to come.

Is 23andMe Stock a Buy: The Bottom Line

23andMe is a high-profile Silicon Valley healthtech company with a lot of growth potential. Its drug development partnerships indicate where its next growth vector can come from, but that growth isn’t likely to appear until later in the decade. Developments are still early in the pipeline, with no late-stage clinical trials to speak of yet.

Still, the company has plenty of revenue originating from consumer sales. And it continues to refine that channel while expanding product offerings. Some argue that the firm is building a two-sided marketplace for DNA. We don’t know yet the privacy and security concerns, but what we do know is that this company is on the bleeding edge of innovation.

With a long runway of development ahead, don’t expect 23andMe to be a big winner until the back half of the decade at the earliest.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.