Invitae Corporation (NYSE:NVTA) made the cut into Cathie Wood’s portfolio but does this high-risk, high-reward genetic testing play deserve a place in yours?
We look deeper to understand why Cathie Wood bought Invitae stock.
The Bull Case for Invitae
Revenues have shot up impressively over the last three years by 29.0% in 2020, 64.7% in 2021, and 12.1% in 2022.
Clearly an exponential increase in top line revenues caught the attention of Cathie Wood and her ARK Invest team. The growth signals that Invitae has gained traction in a rapidly expanding market.
But investors should tread carefully because the top line doesn’t reveal what lies under the hood: massive operating losses. Invitate most recently reported annual operating income losses that stacked up to $566 million.
By going into the red so deeply, the company has lost support from a good chunk of its investor base, which explains why the share price is down so significantly from its highs above $50 per share in 2021.
With that said, the 6 analysts covering the stock remain optimistic that, at least from current levels, significant upside can accrue. Indeed, right now, more than 100% upside opportunity awaits new investors if the analysts’ consensus forecast is realized.
And there are strong indications that it might well be. The company is not just growing revenues at a rapid pace but sits in a solid financial position on the Asset side of the balance sheet with cash reserves of $257.5 million and short-term investments valued at $289.6 billion.
Together, they would appear to offer robust financial support, potentially allowing the company weather any oncoming storms, at least for the near-term.
So, even though genetic testing remains an industry in its nascent stages, Invitae appears to have found the necessary product-market fit to accelerate revenues regardless of market conditions.
The Bear Story
In spite of the pluses, bears have a lot to point to, making the investment in Invitae no slam dunk. For example, earnings per share forecasts are expected to remain negative for the foreseeable future with -$1.24 expected this fiscal year, -$1.10 next year and -$0.94 the following year.
It’s also worth paying attention to the large debt burden of $1.75 billion. Much of that has been deployed leaving a combination of about $500 million combined that is liquid in the form of cash and short-term investments.
The company’s market capitalization of $218 million is indicative of skepticism among investors that the company can ride out the next few years to become profitable before cash runs out.
And make no bones about it, a negative $566.8 million operating income will act as a flame under the cash pile, burning it up in a hurry if it’s not reduced relatively soon.
As you might expect for a company that is struggling to generate positive free cash flows, it pays no dividend so there’s no enticement to value investors hunting for passive income to jump on board.
Why Did Cathie Wood Buy Invitae?
Cathie Wood bought Invitae because the company is pioneering genetic testing, a disruptive technology that aligns with her investment thesis. It has clearly demonstrated demand for its products by growing revenues exponentially over the past 3 years.
With that said, the investment is accompanied by serious risks, the most pressing of which is that cash could run out before management can turn the bottom line from red to black.
There’s a very real risk to current shareholders that a failure to further grow revenues at a rapid pace will mean cash reserves are eaten up, and a secondary offering would be necessary, which in turn would dilute existing shareholders as the total number of shares outstanding would balloon higher.
The bottom line is that Invitae may best be viewed as akin to a call option opportunity, whereby the upside potential could be enormous if the stars align but the downside risk could equally be 100% with any execution stumble.
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.