23andMe Stock: Long-Term Promising (NASDAQ:ME)

Investment thesis

23andme (NASDAQ:ME) has proven to be a viable growth prospect thanks to its broad customer base and trusted brand. Despite some financial gaps and fierce competition in the field of genomic testing, 23andMe is well positioned for continued growth over the next five to six years through continued R&D as well as strategic investments/acquisitions.

Company Overview

23andMe Holding Co. is a healthcare company focused on genetic testing. It operates in two segments: Consumer and Research Services and Therapeutics.

Consumer and research services

The Consumer and Research Services segment is again divided into three different subsections: Personal Genome Service (PGS), Telehealth business and Research Services. The Personal Genome Service primarily consists of direct-to-consumer genetic testing kits that give consumers unique and personalized information about their ancestry, traits and health risks. A large part of the company’s income comes from consumer and search services, particularly PGS with approximately 89% of total revenue coming from PGS in the most recent fiscal year.

The telehealth subsection is a way for 23andMe to use data from genomic testing to help their patients treat certain diseases or conditions. A patient can interact with affiliated licensed physicians and if prescribed a medicine, the patient can access their pharmacy with factual and free delivery services.

Finally, through its research services, the company can use its vast database of genetic information to develop new drugs and treatments for certain diseases. To help with research, 23andMe has entered into a four-year collaboration with GSK (GSK).

Therapeutic

The Therapeutics segment includes drug development as well as research in different therapeutic areas such as oncology and cardiovascular diseases. Currently, the company is the only consumer genomic testing company with multiple FDA clearances for over-the-counter health status reports and was the first company to gain FDA clearance for genetic testing. aimed directly at consumers.

Additionally, as of March 31, 2022, two of their research programs have entered Phase 1 trials, one of which is their proprietary program and the other is the immuno-oncology program.

Industry analysis

The consumer genomics market is a rapidly growing market with a reported value of US$1.9 billion in 2020 and it is expected to grow at a compound annual growth rate of 19.4% from 2021 to 2028. The recent COVID-19 pandemic has driven the demand for direct-to-consumer genetic testing kits, but also the growing presence of rare genetic diseases is expected to drive the growth of the market itself as well as increased public awareness of genomic testing . . Direct access to genomic test results allows users to gain knowledge about their own history and themselves, which helps them make lifestyle changes to improve their health. Moreover, the prices of these test kits have come down, further increasing the demand for them.

Competitive advantage

Some of 23andMe’s biggest competitors in the industry are Ancestry.com, Twist Bioscience Corporation (TWST), Invite Corporation (NVTA), and Illumina (ILMN). However, with the accumulation of the largest genomic database in the world, 23andMe offers the best value at its price. Additionally, what sets 23andMe apart from many of its competitors is its partnerships. The growth of the company depends on the constant scientific development in the field of genomics as well as the increase of its clientele and it does this by forming partnerships with different organizations such as the Michael J. Fox Foundation for Parkinson’s disease . Through partnership agreements, the company has agreed to provide free test kits to members of the organization’s patient community and in return, the organization encourages its members to sign up for 23andMe’s services. They have also entered into additional partnerships with renowned academic institutions such as the Broad Institute at MIT and Harvard and Stanford universities. By forming strategic partnerships with renowned companies and educational institutions, 23andMe has established itself as a trustworthy genomic testing company and increased its brand awareness, helping to boost its customers and sales.

Growth prospects/opportunities

Product development

The success of the company and its subscription model depends not only on acquiring new customers, but also on retaining existing customers and members. This could be done through product enhancements and new product offerings to provide more information to the customer and make it more personalized. This would increase the number of engaged customers who purchase the product.

Acquisitions

Strategic acquisitions are another growth opportunity for 23andMe. Over the past two years, 23andMe has acquired Lemonaid Health, a telehealth company. This allows the company to further integrate its personalized genomic testing services into primary care. Now, it not only helps clients learn something about themselves, but also applies what they have learned about themselves to their lives and healthcare. This opens the door to using genomic testing to help prevent and better manage disease.

Category extension

To grow its customer base, the company also has the ability to expand earlier genomic testing to other categories, which may increase the number of people it can provide its products and services to. However, expanding into new categories comes with research and development costs, marketing costs, as well as customer acquisition costs. Although this is a promising opportunity, if the company does not generate enough revenue to cover its costs, it may not recoup its financial investments in expanding the category.

finance

When we look at revenues, we see that they are relatively stable, with slight fluctuations in recent years. Although 23andMe has negative operating income, a large portion of its operating expenses come from research and development. The company has recently invested more in R&D, which shows that it is well positioned to continue to grow and expand its product offerings in the future. We can also see that 23andMe has a large percentage of its assets in cash, around 48%, compared to Invitee’s 19% and Illumina’s 16%. This may be a sign that the company is not using all of its cash in the most efficient way. Instead of keeping all that cash on hand, they could use more of it to reinvest in the business.

Assessment

Due to 23andMe’s negative earnings and free cash flow, it is difficult to narrow down a solid valuation of the business, but if we compare some valuation metrics of the business with its competitors, we can see that 23andMe is relatively undervalued.

According to recent third quarter financial results, the company’s total revenue for the three months ended December 31, 2022 was $67 million, an 18% increase over total revenue for three months ended December 31, 2021. The primary reason for the growth was increased consumer services revenue due to the acquisition of Lemonaid and an increase in subscription services. Operating expenses increased only 3.22% from $124 million to $128 million for the three months ended December 31, 2021 and December 31, 2022, respectively. And this increase was mainly due to the increase in wages due to inflation and an increase in the workforce of its recent acquisition. This shows that the business is becoming more efficient, allowing it to continue to increase sales at a rapid rate while operating costs begin to decline. As a result, based on the company’s current growth potential through its acquisitions and growing customer base, I believe the company can become profitable within the next five to six years.

Risks

Competitor FDA approval

For some time now, 23andMe’s success has been due to its unique product offerings compared to its competitors. It is the first direct-to-consumer genomic testing company to include FDA-cleared genetic health risk and pharmacogenetics reporting. The company’s competitors have also begun seeking FDA approval for their own genetic health risk reports, which could drive customers away from 23andMe and therefore negatively impact their business. However, with the constant investment in research and development, I believe that the company will continue to improve and improve its products and offer unique new services to its competitors.

Production issues

23andMe has no manufacturing capabilities and does not plan to have its own production facility anytime soon. The company relies on only a limited number of suppliers to manufacture its genomic test kits. This can pose a risk to the business as it cannot control its own production. Although the company has a good relationship with suppliers, 23andMe cannot guarantee that it will always be able to meet the demand for its products and if, in any case, unexpected events such as a pandemic occur. , it will negatively affect the company’s sales.

International economic risks

Currently, 23andMe operates and distributes its products in the United States, Canada, and the United Kingdom. The company has a vision to expand globally and while this could be a very promising opportunity, there will be many regulations and costs associated with it. The company does not have sufficient experience in international expansion. Additionally, there are different regulations, especially in the healthcare sector, in different countries that would increase the risk of international expansion.

Conclusion

I would give 23andMe a buy rating. Although the stock price is a bit shaky and volatile, when thinking long-term, the company has strong potential to be significant in the field of genomic testing with its constant development and just the advancement of technology. in the health sector. Through strategic partnerships, the company will continue to grow and even expand globally, despite regulations and high costs.