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Investment Thesis
Invitae (NYSE:NVTA) is testing the patience of its shareholders, as growth-at-all-cost has fallen significantly out of favor over the last half a year. The stock has dropped by more than 90%. In fact, Invitae’s cash burn has been such that investors have become increasingly worried about a bankruptcy, which is now getting priced into the stock to quite a large degree.
As such, I would liken the stock to AMD (AMD) or NIO (NIO), two other tech companies that at one point have faced such concerns from risk-averse investors, only for those companies to rise from their ashes as their eventual growth led to compelling leverage in their profitability (at least for AMD, but in EVs the profitability aspect has already been proved by Tesla (TSLA)), and with that have come substantial shareholder returns.
Background
Admittedly the company’s products are a bit beyond my own knowledge domain. Seeking Alpha describes the company as follows:
Invitae Corporation, a medical genetics company, integrates genetic information into mainstream medicine to improve healthcare of people in the United States, Canada, and internationally. The company offers genetic tests in various clinical areas, including hereditary cancer, cardiology, neurology, pediatrics, oncology, metabolic conditions, and rare diseases; digital health solutions; and health data services. It serves patients, healthcare providers, biopharma companies, and other partners.
Q1 results
The company’s Q1 results did little to inspire confidence, as both the profitability and revenue growth during the quarter fell short of expectations. With that said, though, like many other turnaround stocks this one will play out over the length of years, as Invitae is targeting to become cash flow positive by 2025.
With “just” 20% growth in Q1 (short of the ~40% full year target), Invitae explained that COVID impacted patient visits, but has seen improved momentum since the beginning of the year. In addition, Invitae is also ramping new reps and has a strong roadmap of product launches. As such, growth is expected to be quite weighted towards the second half of the year.
On the profitability side, Invitae says it has hit peak cash burn.
And to that end, this quarter marked a very important inflection for Invitae. As we communicated on the year end call, the Company has hit a peak in its cash burn and now sees an increased trajectory of burn reduction ahead. In this quarter, we reduced our annual operating burn by over $100 million and we see a path to accelerate the efforts there in.
In Q1 cash burn was reduced by a $100M annualized rate, which is half of the 2022 goal of a $200M reduction. This suggests that on the profitability side the company is actually on track, and at the very least the management has become very serious about pursuing the highest ROI opportunities while pausing other investments.
Cash burn in the first quarter of this year was $169 million compared to $196 million in Q4 ‘21. That represents a sequential drop of more than $26 million in the burn on a quarterly basis or over $100 million in annual run rate, giving us a good start on hitting our goal of lowering the overall burn by more than $200 million in 2022.
Guidance
Acknowledging the weak Q1, Invitae expects to grow by 15-20% QoQ in Q2 and sees further growth in the second half to exit 2022 at a $800M run rate. Gross margin is expected to rise to at least 45% by the end year.
And that’s where we — as we said today, if we look out to the end of the year, taking into account the new sales reps, taking account of new products and looking at the cadence of the year, it looks to us as a 15% to 20% lift into Q2 will get us on track, keep us there. As I mentioned, we’re on the lower end of our performance envelope to hit our plan to beat our guidance this year, and that’s where — that’s what we need to see in Q2. And given what we see as we exit the quarter and today, we have no reason to believe we can’t do that.
Valuation
With a market cap of about $500M, Invitae trades for 1x P/S of its annualized Q1 run rate and nearly 0.6x P/S of its targeted 2022 exit rate. However, in the long-term there is room for expansion of both its multiple and its revenue scale.
For example, Invitae has repeatedly said it is targeting to become a multi-billion dollar company, and obviously its profitability shows that the company has been investing as if it already at such a scale. Let’s assume Invitae will reach $2B at some point.
Invitae has also said it will expand its gross margins over time to about 50%, up from 37% in Q1. This is similar to companies such as AMD or TSMC (TSM), who trade for at least 4-5x P/S.
Combining both indicates Invitae, in the bullish case, could perhaps reach a $10B market cap at some point. This represents a staggering 20x upside. Even accounting for some SBC should leave plenty upside for investors, at the current price. This upside is indeed in line with the likes of AMD and NIO as those have emerged from their bankruptcy concerns.
Final thoughts
Since Invitae reported Q1 results, the stock has dropped by over 50%. Viewing this in context, this simply seems unjustified.
While the company missed on revenue expectations by a few millions (just a few %), the company nevertheless reported a cash burn reduction that seems to be at least on track to its annual target, perhaps even a bit better. This also means the company is now past peak burn, and is also on track towards its longer-term profitability goals. In addition, management overall remained quite bullish about its annual growth plan as well as gross margin trend.
Investor Takeaway
Even though Invitae is not a SaaS company with >80% gross margins, the company’s long-term target of at least 50% (and year-end guidance of a 45% run rate) is still very healthy. In addition, given that the company has a path to continue to grow at a CAGR around 40% for years, the current valuation of just 1x its current run rate (and nearly 0.6x its 2022 exit run rate) provides a significant investment opportunity.
The key to the Invitae thesis is the cash burn due to the prior management mentality of growth-at-all-costs, which is now in the rear view mirror. Invitae saw a nice annualized reduction of $100M in the first quarter, which seems to put the company on track to its $200M goal for the year, which should be driven by a combination of revenue growth and further cost reductions. Looking at the bigger picture, Invitae says it sees a path to extend its cash runway through the end of 2023 and to become cash flow positive by 2025.
In my (admittedly still quite short) time as an investor, I have not seen many – if any – stocks that were valued based on management promises that far out, and Invitae is no different. As such, while the current stock price makes sense given the uncertainty, arguably it does not take an unsurmountable leap of faith to expect a company with, eventually, a multi-billion dollar scale (gaining leverage from scale) at around a 50% gross margin, to reach a valuation (far) in excess of its current ~$500M market cap.
Hence, I rate the stock as a speculative strong buy with potential returns that could rival the likes of NIO and AMD. Be (modestly) greedy while others are fearful.
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