Summary
- 23andMe continues to burn cash with no clear path to profitability in the near term.
- 23andMe has launched new products and services, but the impact on its financial performance has yet to be seen.
- Economic risks and dilution of shareholder value are additional concerns.
- Similar upside risks remain, and therefore we maintain our "HOLD" rating on the stock.
Recap
We initiated coverage on 23andMe ( ME ) in August 2022, and we shared concerns of increasing cash burn and high net losses as reasons for the "HOLD" rating. With two quarterly earnings announcements that have come out since then, we have re-assessed our rating on the stock based on the recent results. Based on our assessment, we maintain our "HOLD" rating on 23andME based on the continuation of high net losses and weakening balance sheet alongside decent top line growth and potential upside risks to mitigate any further bearish recommendation.
Recent Earnings Announcement
Some Positives
23andMe reported some positives in the Q3 2023 earnings announcement , as the company reported a 18% YoY revenue growth in the third quarter. The company also raised its full year guidance, projecting a range of $290 to $300 million for FY 2023. The top line growth along with a guidance increase have led to a decent price action in the stock price, which demonstrates the market's happiness with the recent results. Management reported that the revenue growth was largely driven by increases in revenue from the Lemonaid Acquisition, which also have shown its M&A strategy to be accretive in the recent quarters.
Negatives Remain
23andMe's cash balance continues to be an overall decline and now stands at $432.8 million in the balance sheet. This is roughly 20% below the cash balance the company had in March 31, 2022 when the company reported a cash balance of $553 million. This declining cash balance is exacerbated by the fact that the company reported a net loss of ~-$92 million, which is 3% higher loss than the net loss reported in the quarter a year before. With an adjusted EBITDA deficit forecasted to be in the $170 million to $180 million range in FY 2023, the company's elevated cash burn along with still an uncertain path to profitability remain risks that continue to support our bearish view since the initial coverage.
Other Risks
Furthermore, the company launched an "at-the-market" offering program which allows the company to sell up to $150 million of its shares. We believe the initiation of this program shows the company's awareness of its cash burn situation. For shareholders, such program is negative for shareholders as it will dilute shareholder value and increase the number of outstanding shares. In addition, we find that economic risks will be especially poignant for 23andMe's business as consumers may stop subscription services and other DNA-relating testing methods as recession affects the budgets of individuals. We find core offerings of 23andMe to be a consumer discretionary service that will have high exposure to the health of U.S. consumers.
Upside Risks
23andMe now has a valuation of a little more than $1 billion, which is far less than the 2021 peak nearly $5 billion. With the immense data that 23andMe has along with penetration in key consumer segments and markets, we still find that 23andMe could be a potential acquisition target for life sciences or pharmaceuticals companies. Though the M&A market is not as robust as it were in 2021, we believe that if interest rates were to be lower or market conditions were to be more liquid again, it is possible that 23andMe could be discussed as a potential acquisition target, which may propel its stock price higher above its fundamentals. As a result of this risk, we find it dangerous to be too bearish on the stock in the near-term despite clear risks in its financial performance.
Conclusion
We maintain our "HOLD" rating on 23andMe. In the last two quarters of earnings since our initial coverage article, the company has continued to lose money and spend through its cash reserves without any near-term plan to profitability. The company through its "at-the-market" offering program is trying to raise more cash at the expense of current shareholders. Given the potential for further economic risks, we recommend investors to stay on the sidelines during this period of uncertainty.
For further details see:
23andMe: Still On The Sidelines