Over the past decade, Ark Investment Management has established its niche on Wall Street by making sizable investments in disruptive and groundbreaking technologies. These include genomic research, robotics, artificial intelligence (AI), autonomous driving, and more. Ark is helmed by founder Cathie Wood, who grabbed the spotlight by investing early in hugely successful companies including Tesla, Nvidia, and Block, among others.
After a punishing 2022, the ARK Innovation ETF has come roaring back, generating returns of 55% so far this year, more than two-and-a-half times the returns of the S&P 500. Driving the results were blockbuster performances by Coinbase Global, Roku, and UiPath, which have gained 290%, 153%, and 93%, respectively. Wood believes this could be just the beginning.
While some of Ark’s more high-profile calls seem to get all the headlines, Wood makes the case that biotech company Exact Sciences (NASDAQ: EXAS) has significant upside and will likely rise to $139 by 2027, representing upside of 115% compared to Monday’s closing price. Then there’s the bull case, which calls for the stock to surge to $208, which would represent gains of 222%.
The stock is already up 31% so far this year, so how likely is it that it will more than triple from here, and how should investors approach Exact Sciences going forward? Let’s review the evidence.
The case for Exact Sciences
Cancer is the No. 1 cause of death for people under the age of 85, so it’s no wonder that a cancer diagnosis can be so devastating. However, recent advances in medicine have changed the landscape, leading to early detection. That combined with a host of new treatments has drastically improved survival rates. Exact Sciences, for its part, “helps detect cancer earlier and provide smarter answers at every step.”
The company’s Cologuard screening test is the industry standard test for colon cancer, with more than 13 million tests completed to date. However, recent updates by insurers and Medicare could be a catalyst. Policy changes enacted earlier this year stipulate that once a patient tests positive for cancer via a Cologuard test, a follow-up colonoscopy can be administered at no cost to the patient. This will likely encourage patients to take the relatively inexpensive test in advance of more complex procedures.
Exact Sciences’ next-generation test, Cologuard 2.0, is showing impressive results in clinical trials, generating even more accurate results than its predecessor, with improved sensitivity in cancer detection and fewer false negatives.
The company has also developed the multi-cancer early detection (MCED) screening test, which can check for multiple types of cancer with a single, minimally invasive blood test.
Perhaps most exciting is the development of Oncotype DX tests, which provide genetic information about the specific patient and the biology of their tumor, which gives physicians much-needed insight into the most effective treatments for each case.
Finally, after being buffeted by macroeconomic headwinds for a couple of years, Exact Sciences appears to be back on track. In the third quarter, revenue climbed 20% year over year. Excluding last year’s COVID-19 testing and foreign currency fluctuations, core revenue increased 23%. Perhaps as importantly, excluding one-time charges, Exact Sciences not only swung to a profit but also generated strong operating and free cash flow. Furthermore, management raised the company’s full-year guidance, with increases across each of its major segments.
The assumptions in Ark’s thesis
Ark’s valuation model for Exact Sciences was released in January 2023, outlining three potential outcomes by 2027. The base case suggests the stock will reach $139 by 2027, which would represent gains of 115%. During the same period, the bull case suggests the stock will increase to $208, or gains of 222%. The bear case suggests a price of $74, suggesting upside of just 15%.
While the thesis is based on several variables, the continuing success of Cologuard represents the biggest contributor to its future success, with demand for Oncotype DX as the wildcard.
Exact Sciences is guiding for revenue of roughly $2.48 billion this year, which would represent year-over-year growth of about 19%. In order to achieve Ark’s bear case, the company would have to achieve revenue growth of roughly 14% annually by 2027, which seems like an easy bar to clear given its current pace of growth.
To achieve Ark’s base, Exact Sciences would have to grow revenue by 21% annually over the coming four years, or 26% to reach its bull case. The base case certainly seems achievable, while the bull case seems like a bit of a stretch — but still within the realm of possibility.
Will Exact Sciences stock soar 222%?
Given the economic speed bumps of the past couple of years, Exact Sciences has its work cut out for it in order to achieve Ark’s bull case. If the company can ramp up its precision oncology revenue — or more specifically that of Oncotype DX — it certainly has a shot. Exact Sciences is forecasting revenue from the segment of about $625 million at the midpoint of its guidance, and by Ark’s calculations that would have to climb to more than $1.1 billion by 2027.
That’s not to say the company won’t achieve Ark’s bull case price target of $208 — but it might take a year or two beyond 2027.
Exact Sciences isn’t exactly cheap, currently selling for 4 times next year’s sales. Despite the recent downturn, the stock has soared 449% over the past decade, an enviable performance and worthy of a slight premium.
With multiple catalysts to fuel its growth, a reasonable stock price, and a strong endorsement from Ark Investment Management, now seems like a great time to buy Exact Sciences ahead of a robust move higher.
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Danny Vena has positions in Block, Nvidia, Roku, and Tesla. The Motley Fool has positions in and recommends Block, Coinbase Global, Nvidia, Roku, Tesla, and UiPath. The Motley Fool recommends Exact Sciences. The Motley Fool has a disclosure policy.
1 Supercharged Growth Stock to Buy Before It Soars as Much as 222%, According to Cathie Wood’s Ark Invest was originally published by The Motley Fool
Source: finance.yahoo.com