Cautious investors have long known that healthcare spending rises steadily regardless of the direction of the overall economy. It’s considered a defensive sector, but it still contains stocks that can shoot through the roof, given the right conditions.
This year, the stars aligned for GeneDx Holdings (NASDAQ: WGS), a genetic testing specialist. The stock rose a whopping 6,070% during the 12-month period ended Nov. 13. To put this gain in perspective, Nvidia‘s legendary run over the past five years delivered a return of just 2,700%.
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Of course, everyday investors want to know if the genetic testing stock can climb even higher. Let’s look at the reasons it’s risen so far to find out if it deserves a spot in your portfolio.
In 2022, Sema4 acquired GeneDx, which was at the time a wholly owned subsidiary of Opko Health. Sema4 was employing artificial intelligence (AI) applications to build models of human health, and adding GeneDx’s genome and exome sequencing operation kicked the business into high gear.
When pediatric patients exhibit developmental disorders, autism, or unexplained epilepsy, running genetic tests to figure out what the problem is becoming standard practice. GeneDx can sequence a patient’s genome, which is a complete set of their genetic information. It can also sequence the much smaller portion of the genome that codes for proteins, called the exome.
GeneDx recently reported third-quarter revenue that grew 44% year over year to $76.9 billion. Investors were glad to learn the company’s new genome and exome sequencing operation is a lucrative one, now responsible for 78% of total revenue. Adjusted gross margin rose to 64.4% in the third quarter from 50.7% in the previous-year period.
GeneDx is still losing money on a generally accepted accounting principles (GAAP) basis. After adjusting for stock-based compensation, depreciation, and other noncash expenses, though, the company earned an adjusted $1.2 million during the third quarter.
When reporting third-quarter results, management raised the midpoint of its revenue guidance for the full year to $287 million. A few months earlier, it was predicting $260 million. In response to the guidance raise, Wells Fargo increased its price target for GeneDx from $34 to $75 per share.
Wells Fargo raised its price target but kept an equal weight rating on the stock due to a steep valuation. The stock has been trading for around 7.5 times 2024 sales expectations. For comparison, America’s largest diagnostics businesses, Quest Diagnostics and LabCorp, trade for less than 2 times trailing-12-month sales.
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