10x Genomics has been treading water for the past six months, holding steady at $14.80. The stock also fell short of the S&P 500’s 5.8% gain during that period.
Is now the time to buy 10x Genomics, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think 10x Genomics Will Underperform?
We're sitting this one out for now. Here are three reasons why TXG doesn't excite us and a stock we'd rather own.
1. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While 10x Genomics posted positive free cash flow this quarter, the broader story hasn’t been so clean. 10x Genomics’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 21.7%, meaning it lit $21.73 of cash on fire for every $100 in revenue.
2. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
10x Genomics’s five-year average ROIC was negative 54.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, 10x Genomics’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
10x Genomics falls short of our quality standards. With its shares underperforming the market lately, the stock trades at $14.80 per share (or a forward price-to-sales ratio of 3.1×). The market typically values companies like 10x Genomics based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at a top digital advertising platform riding the creator economy.
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