TXG - 10x Genomics: Unveiling The Investment Potential

2023-11-04 01:02:01 ET

Summary

• 10x Genomics is a life science technology company with a clear mission and visionary leadership.
• 10x Genomics delivered a solid Q3 quarter with revenue reaching $154M, growing 17% YoY.
• The company has a huge growth opportunity in the genomics market thanks to its razor-blade business model and innovative product roadmap.

Investment Thesis

10x Genomics (TXG) is a life science technology company that provides genomic analysis tools for researchers and scientists around the world. The company has a clear mission, a visionary leadership and a compelling business model that is driving revenue growth. It has several catalysts that could drive its future growth and profitability, such as market expansion, new product roadmap and services revenue potential. The genomics market is rapidly evolving and offers a huge opportunity for 10x Genomics. The company can go beyond research and enter the fields of clinical diagnostics and personalized medicine.

We believe that 10x Genomics has a strategic position in a growing market. This, combined with its strong sales performance and commitment to innovation, makes it an attractive investment idea with potential for significant returns.

We rate 10x Genomics as a Buy.

Mastering Biology to Advance Human Health

10X Genomics is a life science technology company that provides genomic analysis tools for researchers and scientists worldwide. The company focuses on developing and manufacturing instruments and platforms that enable the analysis of single-cell genomic data and spatial gene expression data. These technologies are widely used in scientific research, biotechnology, and drug discovery, among others.

10X Genomics has a clear mission: Mastering Biology to Advance Human Health . The company aims to enable researchers to analyze biological systems at a resolution and scale that matches the complexity of biology. The company believes that this will lead to new discoveries and breakthroughs that will transform our understanding of health and disease.

Visionary Leadership

10x Genomics management team has a wealth of experience in life sciences. The co-founder and CEO, Serge Saxonov, was the first employee and founding architect of the biotech company 23andMe (ME). The CFO, Justin McAnear, was the CFO of Illumina (ILMN). The co-founder, president and CSO, Ben Hindson, is an inventor on over 100 patents in various fields. The CTO and founding scientist, Michael Schnall-Levin, is an author on over 20 publications in top journals. The CLO and secretary, Eric Whitaker, has over 20 years of experience in advising life science companies on legal matters.

We believe this team is well-suited to lead 10x Genomics to success. They have strong backgrounds in science, technology, business, and law. They have proven records of innovation, leadership, and growth. They are driven by biology and are passionate about creating powerful tools for scientific discoveries that can advance human health.

The Addressable Market

The global demand for single cell and spatial biological research products is driven by the growing need to understand the molecular mechanisms of human health and disease, as well as to develop new therapeutics and diagnostics. According to the 10X Genomics, the annual opportunity for single cell and spatial biology research is around $16B (see below):

This data suggests that 10X Genomics has a significant presence in the atlassing market, with a 20% penetration level. However, the company has lower penetration in the other areas, such as genetic mechanisms, cellular & molecular biology, and translational research. We believe that 10X Genomics has significant potential to grow in this expanding market, especially in the areas of molecular biology and translational research, which have the largest opportunity sizes.

Razor-Blade Business Model

The 10x Genomics business model is a razor blade model. The company sells its platforms, Chromium, Visium, and Xenium, which are instruments that enable single cell and spatial analysis of biological samples. These platforms are sold at a relatively low margin, as the company invests heavily in research and development to create these products. However, the real profit lies in the sale of consumables, such as reagents, cartridges, and chips, which are required to run experiments using the instruments. These consumables are sold at a higher margin and generate recurring revenue streams for the company. 10x Genomics revenue mix consists of approximately 85% consumables (recurring) and 15% instruments as per its 10-Q filing.

The software enables the analysis, visualization, and interpretation of the data generated by its instruments. It is sold as a subscription fee that is based on the number of users and the duration of the subscription.

In conclusion this is a very sustainable business model that allows the company to capture both the initial and the ongoing value from its customers.

Strategic Acquisitions

10x Genomics is growing its business through both organic growth and strategic acquisitions. We think this is a smart way to diversify its product portfolio and reach new markets. However, the company is selective in its acquisitions. It only chooses companies that align with its vision and that can integrate well with its existing platforms to create new and innovative products. In the past few years, the company has bought several companies that add to its core technologies and capabilities.

Two of them are ReadCoor and Cartana, which helped the company develop Xenium , a leading platform for in situ spatial biology. Xenium has been in high demand since it was launched in November 2022 and is a great example of how 10x Genomics acquires early stage companies and turns them into successful commercial products.

Superior Product Development

Successful product commercialization requires strong product development capabilities, and we think that 10x Genomics excels at that. The company is able to commercialize these acquisitions in a relatively short timeframe, developing from concepts to products with successful go-to-market strategies. For example, Xenium was launched in less than two years after acquiring ReadCoor and Cartana. This is due to the fact that they have multi-disciplinary product teams (including biologists, data scientists, hardware engineers, and software developers) that can build products autonomously and in high speed.

The CEO Serge Saxonov describes their approach to product development as a key strength for the company, highlighting how it facilitates the scaling of multiple products and product lines.

Multiple Catalysts For Future Growth

We believe that 10x Genomics has several catalysts that could drive its future growth and performance. These include:

• Market Expansion: The opportunity to expand its addressable market by entering new segments, such as clinical diagnostics, where it could leverage its products for precision medicine and biomarker discovery.
• Product Innovation: The company has a strong pipeline of new products that could enhance its existing portfolio and create new revenue streams.
• Services Revenue Potential: The company can provide more value-added services, such as consulting, support and training. Currently, the company's services segment accounts for only 2% of its total revenue, indicating a significant room for growth.

2023 Q3 Earnings Review

The company reported strong financial results for the third quarter of 2023, beating analysts' expectations on revenue. Revenue was $153.6 million for the quarter, representing a 17% increase from the same period in 2022 and driven by increased Xenium momentum. The gross margin was 62%, lower than 77% for the same period in 2022, due to the impact of lower margin Xenium instruments on the product mix. The company posted an operating loss of $94.8 million for the quarter, compared to $40 million for the same quarter in 2022, mainly due to the higher R&D and SBC expenses. We think this is reasonable for a growing high-tech business, which needs to retain top talent and invest continuously in costly R&D.

The company also raised its full year 2023 revenue guidance to $610-$625 million, representing 18%-21% growth over full year 2022 revenue.

Fluctuating Gross Margins

One thing that grabs our attention when we check the financials is the unstable gross margins. The company's gross margin for the second quarter 2023 was 68%, which was lower than the 76% gross margin for the second quarter 2022. As we mentioned before, the company's revenue model is mainly based on recurring revenue streams. The reason for the fluctuating gross margin is that when the company launches a new instrument product, Xenium in this case, it usually has a lower margin than its other instruments and consumables.

When the demand is high for newly released instruments, the gross margin will decrease as it sells more instruments. However, the gross margin will increase back again as it starts selling consumables that are used with the instruments.

Besides that, 10x Genomics gross margins are one of the best in the industry. due to its recurring revenue model (see below).

Balance Sheet

The company has a solid balance sheet with ample liquidity and low leverage. It had $357 million in cash and cash equivalents and $99 million in debt as of September 30, 2023. The current ratio and debt-to-equity ratios are within safe levels, indicating that the company has sufficient resources to meet its short-term obligations and fund its growth initiatives.

The company's balance sheet risks are mainly related to its exposure to legal and intellectual property disputes. The company is involved in various lawsuits with competitors regarding patent infringement claims which could result in significant legal expenses.

Valuation

We think that 10x Genomics has a strong competitive advantage in the fast-growing life sciences tool market, which is reflected in its solid revenue performance. According to the Q3 earnings, 10x Genomics will be growing about 20% YoY for 2023 which is a remarkable achievement considering the macro challenges in the industry and China.

One way to measure the value of 10x Genomics is to see what Wall Street analysts think about it. 10x Genomics has an average analyst rating of Buy from 13 analysts. The average price target for TXG is $57, which means a possible increase of 50%.

We agree with Wall Street analysts that 10x Genomics is a buy. We also think that 10x Genomics deserves a higher multiple than its peers due to its accelerated revenue growth and relatively better gross margins.

Risks

Some of the key risks that we are seeing with 10x Genomics are as follows:

• The company operates in a highly competitive industry, and faces competition from competitors that offer similar products.
• The company is involved in various lawsuits with competitors regarding patent infringement claims which could result in significant legal expenses, or losses.
• The company's growth depends on its ability to develop and launch new products. Any delays or failures could harm its business.
• The company has a history of operating losses and may not achieve positive cash flows in the near future.

Conclusion

We believe that 10x Genomics has a strong competitive edge and a huge potential to grow in the Life Sciences Tools market. Our analysis indicates a significant growth opportunity and upside potential for 10x Genomics, making it an appealing investment proposition.

We recommend a Buy rating for 10x Genomics.

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