“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, March 18, 2019

by Ian Harvey

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Option Trade – InVitae Corp (NYSE: NVTA) Calls

Tuesday, March 19, 2019

** OPTION TRADE: Buy the NVTA JUN 21 2019 25.000 CALL at approximately $3.00. Place a pre-determined sell at $6.00.

Also include a protective stop loss of $1.20.

Genetic information company InVitae Corp (NYSE: NVTA) is not only on the cutting edge of revolutionizing healthcare, but it's also already delivering incredible growth to investors.

Invitae is already enjoying rapid growth because of increased demand from patients and would-be parents interested in genetic insights. The company's test volume more than doubled in 2018, and because average revenue per test improved to about $500 (excluding one-time Medicare payments), Invitae's revenue increased 117% to $148 million last year. In 2019, the company expects its growth will continue, so it's guiding for revenue of $220 million.

The costs associated with completing its tests are falling as its test volume increases. The company's cost of goods sold per sample declined 24% year over year to below $250 in the fourth quarter, and that helped gross margin increase to 53% last quarter from 33% in Q4 2017.

February was a great month for genetic testing stocks; and shares of Invitae paced the pack with a monthly gain of 42.9%. The industry has long been a source of massive growth, but is now harboring multiple profitable businesses, too. The greatly improved financial health, coupled with a quickly expanding market for genetic testing services, has plenty of opportunities for options traders.

Shares of Invitae plummeted to an all-time low of $4.35 in March 2018, but the business valuation is at an all-time high of $1.4 billion today.

Shareholders have little to complain about especially following 2018, which saw triple-digit year-over-year growth in revenue and testing volumes. Guidance for 2019 indicates another year of impressive growth is ahead.

About Invitae…..

Invitae is in the business of genetic screening — carrier screening, preimplantation genetic testing, prenatal testing, neonatal testing, and testing adult inherited diseases. In the last decade, it moved from niche, fragmented markets toward a single platform. The company grew from 229 samples in 2013 to more than 300,000 in 2018. This growth has afforded Invitae with two distinct advantages over its competitors…..

  • By cutting the cost of goods sold to below $250, it delivers the highest quality testing at the most affordable price to its customers, and
  • The scalability of its business model. As the market grows, the company increases the number of patients that have their genetic information put to use. Combined with a falling cost profile as volume grows, the company is on track to reach a million samples next year in 2020.

Past Performance…..

Invitae had strong fourth-quarter results reporting fourth-quarter revenue which grew 78.6% to $45.4 million. GAAP EPS came in at a loss of 40 cents, which beat consensus estimates by 3 cents. For the year, volumes grew 102% to 303,000 samples. Exceeding its forecast of 285,000 samples, the company looks set to continue growing its revenue faster than costs. Chances are good that the company will report a profit sooner than expected.

Future Earnings…..

Wall Street analysts expect InVitae to announce $44.99 million in sales for the current fiscal quarter. Four analysts have issued estimates for InVitae’s earnings, with the highest sales estimate coming in at $49.00 million and the lowest estimate coming in at $41.10 million. InVitae posted sales of $27.67 million during the same quarter last year, which suggests a positive year-over-year growth rate of 62.6%.

The business is expected to issue its next earnings results on Wednesday, May 8th.

Moving Forward…..

For 2019, Invitae management sees operating expenses increasing at first as the company invests to grow to 1 million patients. Still, the operating expenses will increase no more than the ~35% experienced in 2018.

Invitae expects to continue spending on sales and marketing, with much of the cost coming from the addition of 140 staff to the sales team. As expected for a growing firm, R&D activity will continue at similar levels to that of 2018.

Influencing Factors…..

The company's laser focus on making genetic screening available to everyone is paying off. It's been able to reduce the cost of genetic screening by over 20% in the past year. And thanks to increasing insurance reimbursement, more patients and prospective parents can afford it than ever before.

In 2018, the company did 303,000 tests, up from 150,000 in 2017 and just 59,000 in 2016. Increasing demand and solid revenue (about $500 per test last year) translated into $148 million in revenue last year, up from $68 million in 2017 and just $25 million in 2016.

And it's important to note that Invitae's momentum is expected to continue. Management believes revenue can reach $220 million in 2019.

Margins are improving and the addressable market is massive, so it may only be a matter of time before it turns a profit.

It is reinvesting big money into research and development and has plenty of financial flexibility. Over 40% of its revenue was put back into research in 2018, and earlier this month, it announced plans to add $125 million in cash to the $132 million it had on the books on December 31 via a public offering.

Declining costs is a good trend which fell from $322 per sample in 2017 to $243 last quarter, down 24%. As the company invests in automation, this number will keep falling. Meanwhile, Invitae has enough demand from customers to keep prices at the same levels. It might even raise prices if customers are willing to pay for the introduction of new content and features. Conversely, adding new screening tests may limit the decrease in costs in the near-term.

With cash, cash equivalents, restricted cash and marketable securities worth $131.9 million, the company is still selling $125 million worth of NVTA stock. Additional liquidity on the balance sheet will give the company plenty of operating flexibility as it carries out its growth. More importantly, Invitae stock’s 52-week highs suggest the timing is favorable to sell shares when the market is willing to bid a higher price.

Analysts Opinions

InVitae had its target price increased by Benchmark from $17.00 to $20.00 in a research note published on Wednesday, February 20th. The brokerage currently has a buy rating on the medical research company’s stock.

Several equities analysts have recently commented on the company…..

  • Chardan Capital assumed coverage on shares of InVitae in a report on Monday, March 4th. They issued a “buy” rating and a $29.00 target price for the company.
  • Oppenheimer started coverage on shares of InVitae in a research report on Wednesday, December 19th. They issued an “outperform” rating and a $20.00 price objective for the company.
  • CIBC started coverage on shares of InVitae in a research report on Wednesday, December 19th. They issued an “outperform” rating for the company.
  • JPMorgan Chase & Co. restated an “overweight” rating and issued a $20.00 price objective on shares of InVitae in a research report on Wednesday, February 20th. They noted that the move was a valuation call.
  • Finally, Benchmark started coverage on shares of InVitae in a research report on Tuesday, November 20th. They issued a “buy” rating and a $17.00 price objective for the company.

InVitae has been assigned a consensus recommendation of “Buy” from the eight brokerages that are covering the stock. Two equities research analysts have rated the stock with a hold rating, five have issued a buy rating and one has assigned a strong buy rating to the company. The average 12 month price objective among brokers that have covered the stock in the last year is $22.25.

Institutional investors that have recently made a change to their positions in the stock….

Summary

Invitae has a solid business model that will lead to market share growth. Revenue is poised to keep growing at current rates, which is impressive.

NVTA has a debt-to-equity ratio of 0.29, a current ratio of 3.90 and a quick ratio of 3.90. The stock has a market cap of $1.43 billion, a price-to-earnings ratio of -10.48 and a beta of 2.07. InVitae has a twelve month low of $4.35 and a twelve month high of $20.88.






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