NTRA - Natera: Cash Burn Remains A Concern

2023-10-25 14:17:58 ET

Summary

• Today, we circle back on Natera, Inc., a fast-growing diagnostic testing concern.
• The company continues to rack up impressive sales growth, but its cash burn remains a primary concern.
• With Natera, Inc. stock down some 30% from recent highs, is now the time to buy the dip?  An updated analysis follows in the paragraphs below.

People would rather live in a community with unreasonable claims, than face loneliness with their truth ”? Bangambiki Habyarimana.

It has been over five months since our last article on Natera, Inc. ( NTRA ) . Since then, the company has posted second quarter results and won a key victory on the patent litigation front. Despite this, the stock has dropped by some 30% recently. A Seeking Alpha follower also requested a follow-up on the company. An updated analysis follows below.

Company Overview:

This mid-cap diagnostic testing and diagnostic concern is headquartered in Austin, TX. Natera's technology platform allows it to read DNA at a very granular level and has allowed it to develop seven offerings in its focus area, which is women's health. These include two oncology tests, three organ health assays, and an out-licensed cloud-based platform to conduct the analysis. The stock currently trades just above forty dollars a share and sports an approximate market capitalization of just north of $4.7 billion.

Second Quarter Results:

The company posted its second quarter numbers on August 3rd. Natera delivered a GAAP loss per share of 97 cents, more than a dime a share better than the consensus. Revenues grew just under 32% on a year-over-year basis to $261.4 million, nearly $20 million over expectations.

Natera received a higher price per test than the same period a year ago, as tests performed rose 23.5% on a year-over-year basis to 617.000. Oncology was a key driver of growth, as these tests rose nearly 90% from Q2 2022 to 88,500.

Despite the sales growth, the company did a commendable job containing costs. Operating costs for the quarter fell $1.3 million from the same period a year ago, to $230.7. This was primarily due to a reduction in headcount as well as a reduction in R&D expense.

Analyst Commentary & Balance Sheet:

The analyst community is currently mixed about Natera's near-term prospects. Since second quarter results were posted, seven analyst firms have reiterated or assigned Buy/Outperform ratings on NTRA including Wells Fargo and Stifel Nicolaus. Price targets proffered range from $70 to $90 a share. Four analyst firms, including Stifel Nicolaus and Barclays, have maintained Hold/Sell ratings on the stock in that time as well. Their price targets range from $64 to $73 a share.

Approximately six percent of the outstanding float in the shares is currently held short. Several insiders have been frequent sellers of the stock since we last looked at this name on May 17th. Since that time, they have disposed of nearly $3 million worth of the equity collectively.

According to the company's second quarter 10-Q report, Natera ended the first half of 2023 with approximately $715 million of cash and marketable balance sheet after posting a net loss of $110.8 million in the quarter, which was down from a $145.2 million net loss in 2Q2022. Early in September, the company raised approximately $250 million via a secondary offering . The company also has just over $280 million of senior convertible notes.

Leadership on its second quarter earnings press release said it expected Natera to consumer between $300 million to $325 million worth of cash to fund all operations in FY2023.

Verdict:

The company lost $5.57 a share on $820 million worth of revenue in FY2022. The current analyst firm consensus is that losses will shrink to just over four bucks a share in FY2023 on revenue growth in the mid 20s. They see a loss of $2.75 a share in FY2024 as sales rise in the low 20s.

The company is delivering impressive sales growth and is likely to have a long " ramp" in that regard as it continues to grow its footprint in oncology. The problem is that fast-growing but profitless companies are not exactly en vogue right now, with the 10-Year Treasury yield (US10Y) recently touching the five percent level for the first time since 2007.

The company is making some progress on the cash burn front. On its second quarter 2022 earnings press release, leadership estimated cash burn for FY2022 to be in the $370 million to $400 million, and FY2023's cash burn projection is roughly $70 million less than that. However, in this current market environment, Natera's cash burn rate is likely to remain a headwind, as the company will have to do additional capital raises before it potentially reaches profitability. Therefore, while I find Natera, Inc. an interesting company, I have no investment recommendation on the stock at this time.

Truth is born into this world only with pangs and tribulations, and every fresh truth is received unwillingly .”? Alfred Russel Wallace.

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