Invitae: Major Restructuring Will Likely Kill Growth Story

Jul. 19, 2022 2:08 AM ETInvitae Corporation (NVTA)ARKG, ARKK, TXG42 Comments
Bill Maurer profile picture
Bill Maurer
33.11K Followers

Summary

  • Company announces actions to lower near-term cash burn.
  • Revenue growth targets come in well below expectations.
  • Stock could easily re-test its 2022 low.
Molecule of DNA, double helix, 3D illustration

Dr_Microbe

Back in March, I detailed how genetics company Invitae (NYSE:NVTA) could massively dilute investors in the coming months. With the company continuing to burn large amounts of cash, it had announced an equity sales program that represented a significant percentage of the firm's market cap. After the bell on Monday, the company announced that the overall business hasn't shown too much improvement lately, resulting in a major restructuring that I believe will destroy the growth story in the coming quarters.

The restructuring is aimed at reducing cash burn significantly through the end of next year. This is an effort to keep the firm's cash runway going to the end 2024. The company will be exiting non-core businesses and geographies to prioritize higher margin business initiatives, while streamlining operations in the segments that will remain. Management expects to deliver approximately $326 million in non-GAAP annualized cost savings in 2023. Unfortunately, this plan results in a major revision of revenue guidance moving forward, with the following statements being taken from the above release:

  • On a preliminary basis, revenue for the quarter ended June 30, 2022 is approximately $136 million.
  • Revenue in the near term is anticipated to be flat in the second half of 2022 over the first half, representing a low double-digit growth rate for full year 2022 over 2021 despite the impacts of the strategic realignment.
  • We expect 2023 to be an adjustment year and for longer term revenue growth rates to return to between 15% and 25% beyond 2023.

Going into Monday, the street was looking for more than $142 million in revenue during Q2 of this year, so this is a decent sized miss. For the first half of the year, this implies just less than $260 million in total revenue, which management says should be flat in the back half of 2022. Unfortunately, analysts were at more than $350 million combined for Q3 and Q4, so this is a significant reduction in the company's growth story. While it's hard to quantify what "an adjustment year" will look like right now, the street was looking for another nearly 35% growth to $832 million next year. Obviously, plans to get to $1 billion sooner than later that were talked about just about 5 months ago are going to be pushed back by a number of years.

Despite the significantly reduced revenue picture for this year, the company is still expected to burn through at least $600 million in cash during 2022. Of that amount, an estimated $75 million to $100 million will be used for restructuring efforts and severance. The company also anticipates its cash burn to be in the range of $225 to $275 million in 2023, which would be a dramatic improvement. Given the company's continued disappointments, I'll remain skeptical until I actually see it happen.

The company's total cash balance was expected to be around $737 million at the end of Q2, but this new forecast is projected to allow them to get through 2024. As a reminder, however, Invitae has over $1.58 billion of debt on the balance sheet, so this isn't exactly a firm with a ton of financial flexibility. Through the years, management has mostly relied on stock sales for funding, with the outstanding share count skyrocketing from just 32 million in April 2016 to nearly 230 million as of April 29th of this year.

As part of this major restructuring, Invitae announced a major shakeup in the company's leadership. COO Kenneth D. Knight named has been named CEO, succeeding Dr. Sean George, who will serve as a consultant for a transition period but remain on the board of directors. Prior to joining Invitae, Mr. Knight most recently served as vice president of transportation services at Amazon (AMZN) for about 8 months, and as vice president of Amazon's global delivery services and worldwide fulfillment human resources for more than three and a half years.

The continued issue I have with Invitae is its failure to meet growth targets in a sustainable way. Analysts were looking for over $1 billion in revenue in 2024, but that figure will come down by at least a few hundred million now. In recent years, investors were buying the growth story and putting up with dilution as a result. Now, they might not see too much dilution in the near term, but you're looking at roughly two years before any meaningful revenue growth will be delivered. The company continues to rack up large losses, and while cash burn will hopefully be reduced, another capital raise could be needed to get revenue growth going again in a meaningful way.

As for the stock, shares closed Monday at $2.67, near the bottom end of their $2.10 to $32.93 range over the past 12 months. The average price target on the street was more than $11, which would imply tremendous upside, but Monday's major warning will send those targets lower. That average target was over $53 just about 15 months ago, and look where we are now. As the chart below shows, the stock was trying to get back to its 50-day moving average (purple line). However, another leg lower could push that key technical trend line even lower, providing more resistance moving forward.

6-Month Chart

NVTA Last 6 Months (Yahoo! Finance)

Interestingly, this isn't the first genomics company to have a bad Q2, and I'm sure it won't be the last either. Last week, 10x Genomics (TXG) issued a major revenue warning, sending its shares plunging. These stocks have something major in common, beyond just their industry. They are both significant favorites of Cathie Wood and her team at Ark Invest, as the ETF firm is a major holder of both names through both the ARK Innovation ETF (ARKK) and ARK Genomic Revolution ETF (ARKG). It's been a tough 18 months for Cathie's actively traded funds, and these recent major revenue warnings are certainly hurting her chances of seeing a major short-term recovery.

In the end, Invitae's announcement of a major restructuring came with a huge growth warning. In an effort to preserve cash and keep the company operating through 2024, management is exiting non-core segments and streamlining operations. Revenues for Q2 came in lower than street expectations and will be mostly stagnant for the next year and a half. While this new plan will hopefully allow the company to have life into 2024 and beyond, this name will continue to be a frustrating one for investors, which is why this sub $3 stock has lost almost all of its value from its $61.59 peak.

This article was written by

Bill Maurer profile picture
33.11K Followers
I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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