Invitae: Cathie Wood's Big Loss Can Be Your Big Gain

Summary

• Invitae is one of the worst-performing stocks in Cathie Wood's Genomic Revolution ETF, down over 90% from the highs of $56.60 set in December 2020.
• The stock has become so cheap it now trades at under half of the book value and roughly 2.4x sales, despite massive revenue growth over the last five years.
• While the growth story remains unprofitable, this is mainly due to increases in R&D spending, which should stabilize over time.
• Book value is around $12-13 per share and the stock is now trading at 52-week lows, basically for the cash the company has in the bank.
• It is not quite a net-net, as the company has debt. However, making a contrarian call on the company at this price could reward shareholders over the long term.

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Investment Thesis

Invitae Corporation (NYSE:NVTA) is a biotechnology and medical genetics company which integrates genetic information into healthcare decision-making by clinicians. The company offers genetic tests for use in many clinical areas, including pediatrics, reproductive health, and oncology; the final being the main driver of growth for the company over the last several years.

Once hailed as the shining star of Cathie Wood's ARKG fund, the stock has now dropped by 90% from all-time highs and is trading for basically the cash the company has in the bank. Dilution and operating losses have plagued the company in the past, but Invitae has been aggressively investing in R&D with a long-term focus. This increased spending will normalize over time, and the company's research and development advantage sets them up as a long-term winner in the genomic space.

A reversion to book value would represent more than a 100% gain, but there is much more upside over the long-term for patient shareholders. Management has recently announced a pivot from external-funded growth to self-funding, and Invitae is poised to continue on a path of revenue growth from their genetic testing business. More advancements in the field will lead to declining costs and as the company's R&D spending levels off, true value will shine through.

A Truly Dirt-Cheap Valuation

Invitae is the poster child for what everyone currently hates in the market. It is one of Cathie Wood's top picks for "disruptive innovation," has an aggressive growth strategy, is currently unprofitable with increasing losses, debt and dilution, you name it, it's got it. So why make a contrarian call now? Simply put, the stock has become so hated and cheap in the current environment that it is too attractive to ignore.

• Book Value: Invitae trades at 0.4x book value, which presents investors with a margin of safety of over 50%.
• Price-To-Sales: 2.4x sales for a company that is growing at such a staggering rate is truly dirt cheap. In 2016, Invitae had annual sales of just $25 million. In 2021, the company posted annual sales of $460 million, showing exponential growth over a five-year period.
• EV-To-Sales: The 4x multiple on enterprise value to sales counts debt into the equation and is still cheaper than counterparts in the space, such as Natera, Inc. (NTRA) which sports an EV/S ratio of 5.1.

Metric Rank NVTA Sector Avg. Change

NVTA Valuation Metrics (Seeking Alpha)

Looking at the forward metrics, and the valuation becomes even more glaringly attractive. FWD EV/Sales is nearing a 3x multiple, which is quite cheap given the growth in sales. The FWD Price/Sales of 1.84 seems completely insane, given the future potential and history of a 79% revenue CAGR over the last five years. On book value metrics, the stock receives an A+ rating with a current and FWD value of less than half of the book.

If Invitae traded at book value, the price would be around $12.87 per share. Depending on financial performance over the next year, book value could be conservatively estimated between $11 and $13 per share. It is not unreasonable to suggest that a reversion to the mean is likely from this point onward, as the market has become so hostile towards the stock that trading near net cash means little for market participants. As the market digests growth stock valuations and many companies are re-rated in the eyes of shareholders, Invitae could once again become a clear winner.

Cash Position, Not Quite A Net-Net

Invitae is so cheap that for a moment this past week, the stock actually traded for around the cash the company has in the bank. On April 28th, 2022, NVTA reached a fresh 52-week low of $4.63.

Looking at the balance sheet, we see that the company has Cash and Short Term Investments of $1,045,400,000. Dividing the total cash position by 228 million shares outstanding, and we get a cash value per share of $4.58. While the price did not quite reach this level during intraday trading, it got within 5 cents. Seeing how this is a very volatile stock, the price could definitely test the $4.50 level in the coming days or weeks, which would be close to the all-time low briefly set for the company in 2018.

Invitae is not quite a net-net at this moment, as the company has debt. However, this might be the closest to a net-net as the stock has ever come to, or will ever come to again.

In terms of the burn rate, Invitae is guiding for around a $200 million reduction of the cash burn rate in 2022. This sets them up with a healthy cash position to execute on the business strategy and realize even more of the company's potential in the coming years.

R&D, Cash Flow, And Cathie's Thesis

Invitae is doing exactly what any biotechnology company should be doing; investing aggressively in its future. One of Cathie Wood's main points in her thesis is that companies who do not, or cannot, keep up with the pace of innovation will be left behind and be subject to what she calls 'creative destruction.' The companies of the future will be the ones who are durable enough to survive, or the ones who can innovate to the point that they eclipse their competition. Nothing about this thesis is incorrect so to speak, but like anything else in the market, timing is key.

Critics of Cathie Wood would likely refer to the stock chart of Invitae over the past year and point out the 'creative destruction' that has taken place in the shares.

Invitae 1-Yr Chart (Google)

With this kind of decline, one has to wonder how the company will turn things around and what exactly went wrong. The answer may surprise you.

Invitae is a growth stock that has become a deep value stock. When looking at R&D spending, we see that the company spends almost as much as it makes quarter by quarter, using available cash to reinvest into research and development for the future. This makes the company's free cash flow decidedly negative in recent years.

Invitae Free Cash Flow (YCharts)

Fast-growing companies tend to lose money as they first start out, as it becomes important to scale up quickly and meet demand, as well as reinvest cash flows back into the business instead of line investors' pockets. This is likely why the market has beaten down NVTA so severely, as the free cash flow trend has really taken a nosedive in 2021 and the business model has been called into question. These free cash flow metrics are seen as a major red flag, but the losses would not nearly be so bad if the company was not reinvesting aggressively into R&D. It seems many investors are not able to see the forest through the trees.

Research and development spending is likely to level off in the coming years, as the company handles costs more efficiently and can build upon existing research with higher returns. Dilution is another main point that market participants have brought up repeatedly, as shares outstanding have almost quadrupled over the last five years. However, the company has a healthy cash position now and should not need to raise capital in the near future. The cash position has clearly been either ignored or forgotten by investors in the last months as the negative narrative became more and more centered around past dilution. This narrative could be changing sooner rather than later, however, thanks to management's recent update.

Management's Recent Update

On the Q421 earnings call, management announced the intention to shift the focus from external funded growth to self-funding. With the narrative around the company poised to move from dilution and R&D spending to operating cash flow metrics, those who have waited until now to buy NVTA could be in for a treat. It will be imperative that management can follow through on this intention, and the road ahead will likely be quite long and bumpy for shareholders. Still, it is a breath of fresh air that management acknowledges what led to such a disastrous stock performance over the last year, and offers a path to reward shareholders over the long term.

The company plans to deliver gross margin improvements, execute lean investment in operational expenditures financed by their own growth, and deliver on value which was set in place from M&A activity in 2020. This combination will improve operating cash flow, and as research and development spending reaches a plateau in the coming years, free cash flow should reach a positive conclusion.

Drivers Of Growth And Future Potential

The primary driver of Invitae's revenue growth over the last five years has been from oncology, as this field has really started to emerge as a new option for many. However, the reproductive health, (pre-natal), and rare disease aspect of genetic testing is just beginning to gain traction and will contribute substantially to the company's revenue growth for years ahead.

Invitae Revenue Growth (Invitae Q421 Presentation)

As we can see in the above graph, the oncology segment has been taking off, accounting for more than half of the total revenues for the 2021 calendar year. What may not be as clear is that the other segments, while a smaller portion of current revenues, are growing at a higher rate. The women's health segment has tripled in a two-year period while the oncology segment has only doubled over the same time frame. The rare diseases/other segment has not yet doubled from 2019 to 2021, but combining this with the data/services segment, and we get roughly the same growth rate as oncology.

This analysis gives two key takeaways: oncology accounts for more than half of the company's revenue currently, but the women's health segment (reproductive health, pre-natal genetic testing) is growing at a faster rate. The oncology part of the business will continue to drive revenue growth for the coming years, but the potential for women's health could eclipse it over the longer term.

The global non-invasive pre-natal testing market is projected to grow from $4.11 billion in 2021 to $13.16 billion in 2028 at a CAGR of 18.1%. With this as Invitae's fastest-growing segment of their business, the company is positioned well to capture market share and reach billions in annual revenues.

Risks And The Impact Of Covid-19

With any investment in a company that is in an emerging and fast-growing field, one must be aware of the risks. Paying too high a price for growth can be disastrous for an investor and a downtrend in a stock price can cause short-sellers to pile on, exacerbating the problem. At this moment, NVTA has a short interest of approximately 13.5% which points to the fact that this has happened. However, I believe that the shares have been beaten down about as much as they could possibly be, since the company is trading near their net cash position.

At today's price of 1.8x FWD sales, investors should not worry about overpaying for growth. However, there are many other risks to consider besides valuation.

The Covid-19 outbreak has had a major impact on the market as a whole, and the real-world ramifications of the pandemic continue to be felt. 2020 revenues were significantly handicapped for many companies, although in terms of the genetic testing field, the growth rate continued and even ramped up in 2021. The main impacts are, of course, supply chain disruptions and manufacturing issues surrounding the pandemic.

Dilution of shareholders over the coming years is another risk to keep in mind, but the company has already raised the cash position significantly, so I do not expect them to offer additional equity in the near term. It is worth bringing up the point that the cash burn rate is also coming down, and the company is shifting the focus from external-funded growth to self-funded.

Due to the somewhat speculative nature of the stock, an investment in the company should only be considered by those with an above-average risk tolerance. There are additional risks to consider for investors, and some of these risks include: potential issues regarding financing activities and inability to compete with larger companies in the same industry.

Conclusion

Cathie Wood's big losses on Invitae can be your big gain, with the company now trading at half of the book value and nearly for the cash they have in the bank. Taking a contrarian view on the stock at this price could prove to be highly profitable, as management has shifted focus to operating cash flow and is beginning the transition from external-funded growth to self-funding. While the oncology segment of the business is the main driver of growth, there is future potential in the reproductive and women's health segment, which is growing at a faster rate with a multi-billion dollar market ahead. A reversion to book value for the shares would represent a 100% gain, but there is likely much more upside long-term for patient shareholders. I currently see the shares of NVTA as a Strong Buy on weakness as volatility in the market persists.

Disclosure: I/we have a beneficial long position in the shares of NVTA either through stock ownership, options, or other derivatives. 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.