10x Genomics: Sticking To The Plan To Avoid The Falling The Knife

seekingalpha06-21

10x Genomics has experienced a significant decline in share price, currently trading around $20 per share, with no bullish indicators for a potential reversal.Recent performance shows growth in total ...

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Liudmila Chernetska 10x Genomics Overview If you have been following my 10x Genomics (NASDAQ:TXG) coverage, you would know that I have been patiently waiting for the conditions to line up to finally establish a position in one of the industry leaders in single-cell and spatial genomics. Sadly, TXG has been suffocated by selling pressure and the share price has experienced a significant decline from its June 2021 high of nearly $209 per share. Now, TXG is trading around $20 per share and is devoid of bullish indicators hinting at a potential reversal. Although I am committed to establishing a position in TXG, I will stick to my parameters to ensure I do not catch a falling knife. I believe we are looking at a multifaceted state of affairs that has fueled this downturn, so I am still going to rely on technical analysis to determine my involvement in TXG and dictate my entry point. I intend to recap 10x’s recent performance and highlight some points for the bulls. Then, I will discuss a number of bearish concerns that could be fueling this relentless sell-off. Finally, I reveal my plan to avoid catching a falling knife, and the conditions required for finally establishing a position in TXG. Recent Performance 10x Genomics reported mixed Q1 earnings with a miss on revenue and their EPS was in line with the Street’s expectations. Despite the lackluster grades, Q1 was a transformational time for 10x with four new products launched, including Visium HD, Chromium GEM-X, multi-modal cell segmentation for Xenium, and a new immuno-oncology gene panel. The company’s four new product launches helped their total revenue to grow by 5% and hit $141M. Digging deeper into the earnings call, the company’s consumables revenue was $110.3M, down 2% year-over-year, with their spatial consumables rising 134% and their Chromium consumables down 17%. 10x’s instrument revenue was up 33% to $25.5M, due to Xenium instrument placements and continued demand for CytAssist instruments. The company’s services revenue was up 91% to $5.2M, thanks to service contracts and the company performing Xenium instrument training. Looking at the geographical revenue performances, the company reported 1% growth in the Americas and 22% in the EMEA. However, APAC continues to be a rough territory with a 2% decrease in revenue. The company reported their gross profit was $92.9M for Q1 with a gross margin of 66%, which was down from 73% year-over-year. The company also reported a rise in OpEx, which came in at $154.4M due to higher legal, facilities, and IT costs. As a result, the company’s Q1 operating loss was $61.5M, up from a $52M loss in Q1 of 2023. Overall, 10x reported a net loss of $59.9M for Q1, compared to $50.7M in Q1 of last year. In terms of cash, 10x reported $371.8M in cash and equivalents, a drop of $17M over the quarter. Bullish Highlights Although the company’s Q1 earnings headlines were uninspiring, I did find a few items to be bullish about. First and foremost, the company launched four products, which should be very competitive and help generate growth. Visium HD has launched and began shipping at the end of March. This platform allows for whole transcriptome spatial analysis at single-cell scale resolution. 10x’s Chromium GEM-X is expected to offer higher performance at a lower cost, which should translate to the company achieving long-term growth in single-cell analysis. The company’s Xenium platform has a new multi-modal cell segmentation product and an immuno-oncology gene panel. In addition, 10x has planned a midyear launch of 5,000 Flex capability and supplementary gene panels, and integrated protein profiling. For me, the company’s GEM-X technology could be the real game changer. The company believes there is increasing interest and adoption of spatial biology among researchers due to improved workflow, sensitivity, better cell recovery, and cost-effectiveness. As a result, researchers achieve deeper analysis of complex samples like tumor microenvironments and immune cells, which can lead to improved therapeutic development and drug target validation. So, 10x still has a number of growth prospects in the near term. In fact, 10x expects to bring in between $670M and $690M, which would be 8%-12% growth over last year. Indeed, that level of growth is not stellar, however, the potential added growth from their recently launched products should add to the company’s intrinsic valuation. Deciphering The Downfall As I mentioned in the introduction, TXG has been experiencing relentless selling pressure with its share price dropping around 90% over the past few years. Multi-year selloffs in biotech are not very common as market conditions and sector rotation provide some reprieve until the company can find a way to justify a higher valuation. For TXG, I believe this selloff has to be fueled by an amalgamation of bearish undercurrents rather than just one primary driver, which has created a relay of selling events over the past few years. Easy Up… Easy Down First, I would point out that TXG was one of the biggest beneficiaries of the biotech frenzy that occurred during the initial phases of the COVID-19 pandemic. During that period investors were bidding up just about any biotech or healthcare-related ticker, and the subsequent economic recovery fueled any ticker reporting growth. TXG went from trading under $50 per share to over $200 per share in less than a year. Then, we saw a shift in healthcare priorities that damaged the valuation of some COVID-tickers, as the market reassessed the long-term growth prospects of these companies. So TXG, the ticker benefitted from being a part of the biotech frenzy in 2020, but the bulls dried up and the harsh reality of the absurd valuation called the bears to feast. Since the freshly IPO’d ticker had an easy ride up on low volume, it was relatively easy to bring it down on elevated trading volume. Economic Environment Since the middle of 2021, the economy has had to digest several influences including inflation, supply chain concerns, and increasing interest rates. These factors have had a significant impact on the stock market, which has created some apprehension around speculative tickers including those who have been labeled as rich or premium valuation stocks… like 10x Genomics. Instead, it looks as if investors navigated to blue-chips, value-names, and high-growth. Although the high-inflation, high-interest-rate environment has not really damaged 10x Genomics, the company’s customers can be impacted by this type of economic environment. Fading Growth Of course, not every concern is market or economic-related. 10x Genomics has been dealing with a number of company-specific challenges that can fuel selling pressure. Primarily, the company has reported slowing revenue growth and rising costs, raising concerns that 10x might not be able to maintain a growth trajectory and ultimately achieve near-term profitability. 10x Genomics Earnings History (Seeking Alpha) This is marked in the company’s earnings history, where they have occasionally fallen short of the Street’s expectations. One doesn’t need to be a Wall Street analyst to know that companies with fading growth are not treated well by the market… especially ones that have not reported a positive EPS. Supply Chain Another concern has been negative headlines, including that 10x Genomics has struggled with supply chain interruptions that have impacted their capability to deliver products on time. Although the company appears to have addressed most of these concerns, it appears to have had a lasting impact on revenue, and operational costs and can squeeze margins. ARKG and Cathie Wood I believe one of the more intriguing aspects is TXG’s link with Cathie Wood's ARK Genomic Revolution ETF (ARKG). Cathie Wood's ARK Investments began investing in TXG in September 2019. It was only several months later that we had the COVID Crash, and the market turned to tech names, where Cathie was heavily invested. Cathie became the hot hand in 2020, and retail investors began following her trades throughout the pandemic, including her TXG moves. TXG Daily Chart (2019-2022) (Trendspider) Looking at TXG’s Daily Chart from 2019 to mid-2022, we can see spikes in retail investor activity as the share price moved higher. However, retail investor activity has slowed with only a couple of spikes since 2022. TXG Daily Chart (2022 – Present) (Trendspider) So, it looks as if once the hype was gone and Cathie Wood’s trades lost their allure, retail investors began to move away from the ticker. Similarly, the ARKG monthly chart began to tumble as Cathie’s holdings became targets for Matthew Tuttle’s AXS Short Innovation Daily ETF (SARK) (Now Tradr Short Innovation Daily ETF). It appears that most of the buzz around shorting Cathie Wood was related to her ARK Innovation Fund (ARKK), but some of her other ETFs have had a rough go since 2021, with ARKG going from about $115 per share to under $25 per share in less than three years. ARKG Monthly Chart (Trendspider) I am not implying that TXG’s performance is in lockstep with ARKG and Cathie Wood’s influence, but I don’t think it is a complete coincidence that their status appears to be somewhat correlated. NanoString Technologies Last but not least, I believe one of the more recent factors contributing to the decline in TXG has been its ongoing legal battles with NanoString Technologies. Although these legal disputes have added to investor uncertainty over the years, the recent German court ruling against 10x’s case involving NanoString's CosMx Spatial molecular imager product for RNA detection. The courts have invalidated the German portion of 10xGenomics’ patent No. 2794928 B1, which 10x claimed was infringed by NanoString’s CosMx product. Bruker (BRKR) acquired NanoString’s business on May 6th, and will now seek to end the injunction affecting CosMx sales in Germany. This ruling has placed a dark cloud over the ticker because it may have a tangible impact on the company’s financial performance and operations in Germany. In addition, the ruling might have influence in other court systems, where 10x and NanoString are matched up in protracted legal battles, which could generate additional legal costs, and operational disruptions, as well as impact investor sentiment. Avoiding The Falling Knife As I mentioned in my previous article, I have tried to find an entry point on TXG numerous times, but the chart’s technical analysis has prevented me from pulling the trigger. Therefore, TXG has remained out of a Compounding Healthcare portfolio but is still on the watchlist. The share price failed to hold an uptrend established from the low from October 2022 and is trading below all anchored-VWAPs as well as 200-Day EMA. So, the ticker is still incredibly bearish and continues to hit new lows with a very bearish rating on the Go-No-Go indicator. TXG Daily Chart (Trendspider) Admittedly, one could say this chart does not represent a “Falling Knife”, however, the repeated downtrend rays and relentless selling pressure have prevented the ticker from producing a high-conviction reversal for nearly a year. Although I am restlessly monitoring the ticker for an entry, I am not going to step in front of a freight train that appears to be destined to move lower. Indeed, TXG will be undervalued for its revenue and growth prospects at some point. Looking at the Street’s revenue estimates, they believe 10x will clear $1B in revenue by the end of 2028 and will continue to report growth into the next decade. 10x Genomics Revenue Estimates (Seeking Alpha) The industry’s average price-to-sales is about 4x-5x, so $1B in 2028 would be a 2x forward price-to-sales, which would justify $33-$42 per share in a few years. 10X Genomics EPS Estimates (Seeking Alpha) Furthermore, the Street expects the company to report a positive EPS in 2028, so it is possible that the market will support that valuation. Unfortunately, the company only has $371.8M in cash and equivalents and has an average quarterly cash burn of about $31M since Q3 of 2021, which would fall short of 2028. On the other hand, 10x expects capital expenditures to be between $15M to $20M over the next 12 months and will continue to drive positive cash flow for the year, so the cash position could survive long enough to see a higher share price. Still, investors need to accept it is possible they will be forced to perform some dilutive funding before the company achieves breakeven. So… when is TXG too cheap to pass by? A simplified Discounted Cash Flow (DCF) model with the following assumptions.  Discount Rate - 10% Tax Rate - 21%  Revenue Estimate for 2024 - $670.06M EBIT Margin - 15% CapEx - $20M (Typically 3-5% of revenue) Change in Working Capital - 5% of revenue  This rough DCF for TXG in 2024 would point to $10.11 per share, which is not what Longs wants to see right now. Certainly, the company’s long-term prospects should back a higher share price, but I will use $10.11 as my “Too Cheap To Pass By” level, or my Buy 2 Level for 2024. At those prices, I am looking for the slightest indication of a reversal before hitting the buy button. Although I do like to have a fundamental valuation to lean on for TXG, I still believe my entry will be dictated by technical analysis. However, that is not going to happen unless the sector finally shows some support to TXG in the coming weeks. If that occurs, I will look to make my TXG breaks above the anchored-VWAP from the proximal high before establishing an entry. Once I have opened a position, I will stick to my previous plan of adding to the position following earnings reports that could reignite the growth narrative for TXG.  Make note, I will be looking to trade TXG in order to secure profit and build a “House Money” core position for a long-term investment.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445756748"}