TXG - 10x Genomics: Long-Term Growth Potential Marred By Near-Term Funding Risks

Summary

• 10x Genomics is targeting larger addressable market opportunities over the mid to long term.
• The accelerated Xenium launch will bolster the growth potential but may be insufficient to plug a looming shortfall next year.
• While cost cuts will help, it remains unclear if they will be sufficient to mitigate a narrowing liquidity runway.

10x Genomics ( TXG ) held its inaugural investor day earlier this month, highlighting the case for a significantly larger addressable market opportunity long-term and an enhanced near-term growth outlook following the commercial launch of Xenium. The latter is a particularly positive step, as it allows TXG to expand its offerings into in-situ analysis instruments, adding to its leadership in single-cell analysis and spatial transcriptomics.

That said, there was little in the way of mid-term guidance updates or further commentary on the FY23 outlook, as management refrained from committing to any guidance ranges. With the core single-cell business continuing to decelerate, this likely means a weaker setup into the next year unless management can extract meaningfully higher opex/capex efficiencies. Perhaps even more importantly, the cash burn is high, and a further narrowing of the liquidity runway could result in a dilution event down the line. The stock isn’t cheap either at ~7x EV/Sales, so even if investors are bullish about the company’s competitive positioning, holding out for a better entry point might be the prudent move here.

A $16bn TAM Opportunity with Room for Further Expansion

TXG’s existing offerings give it access to a ~$16bn addressable market opportunity (or TAM) broken down as follows - translational research at ~$7bn, cellular & molecular biology at ~$5bn, as well as atlassing and genetic mechanisms at ~$2bn each. The new insight at this year’s analyst day was that TXG is also targeting downstream clinical applications, given the outsized cancer diagnostics opportunity at ~$10bn. This could expand significantly, though, should TXG successfully penetrate new disease applications down the line. Depending on the pace of adoption of large-scale, high-resolution methodologies over the long run, management sizes the overall life science TAM potential at a massive ~$67bn.

Digging deeper into the slides, the translational and clinical sub-segments seemed to be management’s focus areas. Given these were also sized as the larger market opportunities with longer penetration runways (translational research currently has <5% penetration), expect management to deploy more resources towards commercializing these areas to build out its broader biopharma presence. This represents a welcome strategic shift from the prior focus on single-cell analysis tools, which had seen relatively slow adoption by a mostly academic end market.

Xenium Platform Launch Accelerated But Near-Term Challenges Remain

Another key takeaway from the event was the commercial launch of the Xenium In Situ Platform, which enables high-throughput subcellular mapping of RNA targets, ahead of the previously guided FY23 launch date. Management didn’t disclose many specifics, though, other than that the first shipments have taken place and that demand for the platform has been strong thus far. Given the low cumulative revenue base at ~$78m for the spatial segment in Q3 (mainly from molecular profiling solution Visium), a successful Xenium ramp-up should drive further growth in FY23.

While the latest Xenium development is positive for the revenue trajectory heading into a challenging year ahead, it remains early days, and revenue contribution will likely be minimal in H1 2023. Even in an optimistic scenario where a larger ramp in H2 2023 materializes, it won’t be a game-changer, and overall growth will still be dependent on a decelerating Chromium business. Also concerning is that Xenium is projected to be dilutive to overall gross margins in the initial stages. Thus, pending economies of scale for Xenium, the cash break-even timeline could suffer delays, driving elevated funding risks ahead.

Free Cash Flow Breakeven Target Reiterated

Somewhat disappointingly, management offered minimal color on the FY23 outlook; instead, it reiterated the $500-520M revenue guidance range for FY22 and the cash flow break-even target by FY23. This seems counterintuitive to me – not only will new product launches such as Xenium be insufficient to offset the decelerating core single-cell business, but the incremental margin dilution will likely push the break-even timeline further out. This leaves opex cuts and other efficiency initiatives as the key levers to get there, with reduced headcount increases and an >50% capex reduction earmarked for next year post-buildout of the new facility in H1 2023.

Long-Term Growth Potential Marred by Near-Term Funding Risks

As its investor day presentation outlined, the long-term TXG growth outlook remains intact. Having cemented its leadership in single-cell genomics research via its Chromium platform, the company is now looking to expand into new product launches across Spatial and In Situ going forward. In sum, the opportunity for significant TAM expansion is compelling and should drive growth for the years to come.

Yet, funding the pipeline is expensive; with TXG also contending with near-term macro headwinds, along with a decelerating core single-cell business, there is a material risk of a capital raise, in my view. From here, execution will be key to driving the guided revenue inflection and the FY23 cash break-even target. While the stock has been beaten down YTD, at ~7x fwd revenues, there is likely still quite a bit of optimism priced in; thus, I would hold off for a better entry point down the line.

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