Personalis: Very Cheap, Promising And Uncertain – Personalis, Inc. (NASDAQ:PSNL)

Personalis (PSNL) has triggered my interest since it has gone public in the summer of 2019. With PSNL reporting its full-year results in the middle of the Corona crisis, it is time to update my stance on the company. Fourth-quarter results were more or less in line with expectations, and despite some nice anecdotal comments about the order intake, the company failed to quantify this. Furthermore, the company withdrew its full-year guidance, making the situation not very clear for investors, yet fortunately expectations are very low.

The Business, The Thesis

Personalis is an inherently interesting business in my book, yet despite the growth potential, I felt that the business had lots to prove when I looked at the stock last summer.

The company is a cancer genomics business which has a goal to change the way in which next-generation therapies are being developed. The methodology of the company to develop such new therapies comes from a large set of molecular data, allowing for individual cancer treatments and immune responses, all facilitated by the NeXT Platform of the company.

I am compelled to the concept of personalized medication as I think that might be a long-term growth trend within medication, as more than 50 pharmaceutical names use its platform, including many prominent names. These factors and the observation that the company was founded by a former executive of Illumina (ILMN) all made me interested in the name.

Valuation and Performance Thoughts

In June, the company sold nearly 7 million shares at $17 per share in an offering which raised nearly $120 million in gross proceeds. Those shares initially rose to levels around the $30 mark in the first weeks following the public offering, yet shares have come down quite a bit in recent months.

The 28.5 million shares outstanding valued the equity of Personalis at $484 million last summer at $17 per share, although that valuation included a net cash position of around $135 million, resulting in operating assets being valued at around $350 million.

On the back of that valuation, I was a bit cautious last summer as this is a small and loss-making business. Personalis generated sales of $9.4 million in 2017 on which it lost $22 million. Sales quadrupled to nearly $38 million in 2018 with operating losses coming down to nearly $14 million, quite an encouraging trend both in terms of sales and margins. Despite the losses, the company was trading around 9 times sales as the IPO price looked compelling given the rapid pace of growth. Around the time of the IPO, about half of sales were generated from the Veterans Affairs Million Veteran Program, creating lumpiness and dependency on the business.

I furthermore liked the sequential improvements seen early in 2019. First-quarter sales rose to $14.1 million, and the second-quarter sales numbers totaled $15.8 million, with operating loss narrowing to $4.1 million. Note that for both the first two quarters, the company relied on the Veterans Affair program for more than half of its sales.

My concern at the IPO was that of the outlook, with the company calling for 2019 sales of $60-$62 million. Based on first-half sales of $29.9 million, this suggested that sales would come in at $30.1-$32.1 million in the second half of 2019, essentially suggesting flattish revenue growth. This guidance was a bit conservative, as the company reported relatively good third-quarter results in November. Sales came in at $17.2 million as the company booked another $38.1 million order related to the MVP program.

While the third-quarter numbers were solid, the reliance on the MVP program increased to 75%, indicating that just $4.3 million in commercial revenues were reported for the third quarter, as operating losses increased to $5.7 million. The company guided for fourth-quarter sales of $17.4-$17.9 million and outlined an initial guidance for 2020 with sales seen at $80.5 million, plus or minus three million.

With 31 million shares in November trading at $10, the $310 million valuation included $127 million in net cash, implying that operating assets were valued at less than $200 million, about 2.5 times sales seen in 2020.

In theory this looks compelling given the growth, albeit that the company still loses some money and is reliant on a large customer, with 2020 commercial sales seen at just $21-$25 million, suggesting that no real pick-up in those sales is seen in 2020.

The Latest Numbers

Fourth-quarter sales reported by Personalis rose 38% year-on-year to $18.2 million, coming in slightly above the latest guidance issued when it released its third-quarter results. The reliance on the MVP program is again very high with just $4.4 million in revenues in the fourth quarter being generated from the commercial side of the business. Disappointing is the uptick in the operating losses reported by the business, with fourth-quarter operating losses totaling $7.2 million.

Valuations have only come down further with shares now trading at $7 per share. With little over 31 million shares outstanding, the market value of the firm amounts to roughly $220 million, and in combination with a net cash position of $128 million, operating assets are essentially valued at around $100 million.

Comforting is that orders have reportedly been strong in the fourth quarter with nine different customers placing orders for the NeXT platform in the final quarter compared to 10 in the first nine months of the year. Unfortunately, the company has not quantified the size and value of these orders. Some guidance would be welcomed as commercial sales for all of 2019 totaled $21.3 million, up just 13% year-over-year. Based on the initial guidance provided for 2020, which now has been withdrawn, the company saw relatively limited sales growth in the commercial business.

All of this is a bit disappointing as the company had the opportunity to still provide more comments about 2020 following apparently solid order conversion in the fourth quarter. With the company reporting losses at a rate of $25-$30 million, the +$100 million net cash position allows for losses to be funded for 4-5 years to come.

The issue is that it is disappointing to see slow conversion on the commercial side as that the business is largely reliant on the MVP program. On the bright side, the company has plenty of time and cash to fund the current losses, while the valuations are quite depressed, with operating assets trading at just $100 million, just over 1 times sales seen this year.

For all these reasons, I am actually reasonably optimistic here, and I note that the risk-reward seems good with the reward stemming from inherently interesting business and very low valuations, while the risks relate to execution and the competitive position of the firm, hard to gauge for an outsider.

Nonetheless, I am happily doubling down here on a reasonably modest position, as this could be an interesting growth story going forward, or perhaps takeover target for that reason.

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Disclosure: I am/we are long PSNL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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