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Guardant Health: Growing But Possibly Overvalued?

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About: Guardant Health, Inc. (GH)
by: Alpha Generator
Alpha Generator
Long/short equity, Deep Value, growth at reasonable price, special situations
Summary

Guardant Health is a $6 billion+ precision oncology testing company working on some exciting new technology in the cancer space.

The company offers liquid biopsy and molecular diagnostic tests for various cancers.

While the company is quite well capitalized with lots of cash on the balance sheet, profits and positive cash flows are likely a long way away.

Guardant Health (NASDAQ:GH) is a $6 billion+ market capitalization precision oncology testing company that is developing some exciting new technology in the cancer space. The company announced the closing of its initial public offering on October 9 of last year, raising just over $270 million in cash to fund future growth. With the company reporting earnings later this week, it's worth a closer look.

Company Fundamentals

The company's stated mission is to "conquer cancer with data". In the exciting world of oncology, this is a lofty and admirable mission. The company is developing interventions for patients at all stages in the cancer timeline: those with advanced-stage cancer, those who have survived cancer, and even those who are asymptomatic and have not been diagnosed with cancer but who may be high risk to develop the disease.

The company's total addressable market is indeed large, but the platform is going to take tens if not hundreds of millions of dollars more to develop to truly capture revenues on the order of magnitude the company promises. Revenues have indeed been growing rapidly, but still remain relatively low compared to the company's market capitalization. Gross profit margin has also increased significantly over the last quarters, but the pace of increase is not sustainable going forward and it may be that margins are approaching their long-term levels.

The company trades at nearly $70/share, yet retains cash per share of only $6 and book value per share of only $9. P/S ratio is at a lofty 40x+. While the company has admirable gross margins of over 60%, operating margin and profit margins are negative to the same magnitude - not promising for shareholders.

While the company is poised to capitalize on some cutting edge technology platforms, there remains execution and commercial risk and the nature of the company's development programs going forward means that the large cash balance is likely to be consumed in its entirety on the road to higher sales and potential profitability.

Risks

The company states in its 10-K that it is largely reliant on sales of its Guardant360 test, which started selling in 2014. This test comprises the substantial majority of the company's revenue to date. This test's progress in both development and in terms of reimbursement should be monitored as the entirety of the financial value of the company is essentially this test today.

GH also discusses other risks in its 2018 10-K, which is worth reading. One of these is a commercial joint venture with Softbank to "accelerate the commercialization of our products in Asia, the Middle East and Africa, with a near-term focus on Japan." Shareholders should monitor the status of this JV going forward as well.

There are a significant number of unknown risks as well that may surface over coming quarters as the company reveals more results to the public marketplace. The company management at GH is taking on a lot of initiatives, and there are many avenues for potential success - or failure.

Conclusion

Investors should avoid GH for now and wait for some more data points around the company's expected time to profitability. The company reports earnings on November 7, and I will be watching carefully. Good luck to all.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.