Is 23andMe Stock a Smart Buy Right Now?

Genetic-testing company 23andMe (ME -9.08%) is a household name, but does that make it a smart investment? After all, if the tangible health benefits of learning more about your genome are as significant as the company claims, people would be rushing en masse to use its kits to get their genes sequenced.

As it turns out, people who bet on this company three years ago are now down more than 95%. But that might make for the perfect buying opportunity if the conditions are right. So let’s explore the investing thesis for this stock a bit further to clarify whether it’s a future winner or an investment with slim chances of success.

This stock hasn’t lived up to expectations

You’ve probably heard of 23andMe because of its genetic testing platform, which gives people analyses of their DNA in exchange for a one-off or recurring fee depending on the service.

It’s true that there’s a lot of value contained in its database of the genomes of 14 million customers and counting, which is said to be among the world’s largest in terms of the number of participants who have consented to being contacted for the purpose of conducting medical research. But there’s a lot more to the company than extracting genetic data from samples of saliva in test tubes and displaying the information in a nice report.

In theory, 23andMe’s business model has three components. One is devoted to its consumer genetic-testing business, another aims to license out its corpus of genetic data and to forge collaborations with pharmaceutical companies under the heading of research services, and the last one is its in-house research and development (R&D) group that uses its data to develop and eventually commercialize new medicines.

That means it could have an interesting revenue mix, wherein the daily recurring sales from its consumer genetic tests and data subscriptions could fund its platform development as well as its therapeutics pipeline.

Then, perhaps with the help of a collaborator, commercializing its drugs could provide a significant and long-lived boost to the top line, granting shareholders a nice payday, and seeding the ground with the resources for further R&D work to repeat the process.

Even if collaborators take the lead role in the process, it could still capture some extra revenue from royalties and milestone payments, with the added benefit of potentially avoiding liability for many of the traditional commercialization costs.

In practice, its business model has so far failed to deliver anything near the ideal conditions described above. Since three years ago, its third-quarter revenue has fallen from $55 million to $45 million, and its quarterly operating losses have worsened, moving profitability further away from being in reach.

The company’s testing services account for 96% of its revenue, and its research services account for the rest — but rather than scaling up that segment over time, the reverse appears to be happening.

The fact that its biopharma peers aren’t scrambling to collaborate with it to get access to its genetic database is not a good sign at all as it suggests they either don’t find it to be valuable or that they simply don’t need to access the data very frequently as a group of customers.

Its largest collaborator, GSK, could pay as much as $20 million annually for access to its databases, but that won’t be enough to stop 23andMe from burning cash each quarter.

Its only pipeline program in the clinical stage is its biologic for solid tumors in phase 2a trials, which should report some data sometime this year. But it might not make it to the market for at least a few years even if the data is good.

And despite management’s claims of catalysts for the stock being just around the corner, there does not appear to be any major intention to change the company’s trajectory.

Don’t write it off just yet, but don’t dive in, either

23andMe is not about to go out of business. It has $242 million in cash, equivalents, and short-term investments in hand, whereas its cash burn for its 2023 fiscal year was roughly $177 million. Sentiment might be poor, but given its database and ongoing revenue from its testing customers, it can probably raise more debt at an acceptable interest rate if it runs low on cash.

But that does not mean you should be thinking about this stock as a smart purchase.

People who buy shares today might need to wait two or more years before seeing a significant return, if one ever happens. There does not appear to be strong and enduring demand for its consumer testing offerings, nor for its data as a resource to license, nor for its capabilities as a collaborator.

And all that is before thinking about the standard set of risks for biopharma stocks in which clinical trials can fail and cause disaster for shareholders. So try investing in something else for now, and circle back later to see if things improve.

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