Cautious investors have long known that healthcare spending rises steadily regardless of the direction of the overall economy. It’s considered a defensive sector, but it still contains stocks that can shoot through the roof, given the right conditions.
This year, the stars aligned for GeneDx Holdings (WGS -7.19%), a genetic testing specialist. The stock rose a whopping 6,070% during the 12-month period ended Nov. 13. To put this gain in perspective, Nvidia‘s legendary run over the past five years delivered a return of just 2,700%.
Of course, everyday investors want to know if the genetic testing stock can climb even higher. Let’s look at the reasons it’s risen so far to find out if it deserves a spot in your portfolio.
Why GeneDx keeps soaring
In 2022, Sema4 acquired GeneDx, which was at the time a wholly owned subsidiary of Opko Health. Sema4 was employing artificial intelligence (AI) applications to build models of human health, and adding GeneDx’s genome and exome sequencing operation kicked the business into high gear.
When pediatric patients exhibit developmental disorders, autism, or unexplained epilepsy, running genetic tests to figure out what the problem is becoming standard practice. GeneDx can sequence a patient’s genome, which is a complete set of their genetic information. It can also sequence the much smaller portion of the genome that codes for proteins, called the exome.
GeneDx recently reported third-quarter revenue that grew 44% year over year to $76.9 billion. Investors were glad to learn the company’s new genome and exome sequencing operation is a lucrative one, now responsible for 78% of total revenue. Adjusted gross margin rose to 64.4% in the third quarter from 50.7% in the previous-year period.
GeneDx is still losing money on a generally accepted accounting principles (GAAP) basis. After adjusting for stock-based compensation, depreciation, and other noncash expenses, though, the company earned an adjusted $1.2 million during the third quarter.
When reporting third-quarter results, management raised the midpoint of its revenue guidance for the full year to $287 million. A few months earlier, it was predicting $260 million. In response to the guidance raise, Wells Fargo increased its price target for GeneDx from $34 to $75 per share.
More gains ahead?
Wells Fargo raised its price target but kept an equal weight rating on the stock due to a steep valuation. The stock has been trading for around 7.5 times 2024 sales expectations. For comparison, America’s largest diagnostics businesses, Quest Diagnostics and LabCorp, trade for less than 2 times trailing-12-month sales.
GeneDx is succeeding now because, in 2023, the company shifted its commercial focus to pediatric neurologists. This niche could provide more growth in the years ahead because the company has only scratched the surface. According to GeneDx, sales have penetrated just 12% of American pediatric neurologists.
GeneDx says it has an 80% share of the U.S. exome sequencing market. Newborn screening represents a $10 billion-per-year opportunity, and it isn’t the company’s only addressable market. If GeneDx remains a market leader in the exome sequencing space for several more years, it could produce enormous gains, despite a steep valuation at the moment.
Before adding shares of GeneDx to any portfolio, it’s important to realize the diagnostics industry is fiercely competitive. Marketing exome sequencing to pediatric neurologists is producing a sliver of profits now. Unfortunately, it’s only a matter of time before a slew of competitors enter the niche with competitive pricing.
You don’t have enough fingers and toes to count all the potential providers of exome sequencing that noticed GeneDx’s recent success. With this in mind, it’s probably best to watch this stock from a safe distance.
Wells Fargo is an advertising partner of Motley Fool Money. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Quest Diagnostics. The Motley Fool has a disclosure policy.
