Twist Bioscience (TWST) - Get Twist Bioscience Corporation Reporthas dropped 43% from the beginning of the year through the end of July. They may still be overvalued.
The company, which is leading in DNA synthesis for biotech researchers, should be traded at a premium. The magnitude of the present premium may be debated.
The current market cap would equal a valuation of 12.3 times sales if the business achieves fiscal year full-year 2022 revenue of $200 million.
If the business meets Wall Street's consensus fiscal full-year 2023 revenue estimates of $260 million, then shares are currently trading hands at 9.5 times forward sales.
Both are a bit rich, particularly for a company that is expected to suffer a record operating loss in fiscal 2022 and with a historically strong US dollar. Investors must prepare for all outcomes ahead of fiscal Q3 2022 financial reports, which will be released on August 5.
What Does Twist Bioscience Do?
Twist Bioscience is a leader in DNA synthesis. DNA synthesis is the process of constructing the genetic code, from engineering microbes to fabricating polymers for foldable smartphone displays to ensuring the accuracy of liquid biopsy instruments. It's a pretty sweet industry.
Genscript Technology and Integrated DNA Technologies IDT, both privately held, have a better track record when it comes to quality control, which is vital. However, the cost advantages of Twist Bioscience's platform have allowed it to claw its way to significant market share for the time being.
Twist Bioscience's rapid growth has attracted investors. Revenue has grown from only $2 million in 2016 to $132 million in 2021. Sales are expected to exceed $200 million in fiscal 2022, thanks to its size. It may be taken for granted in software businesses, but it doesn't always happen in physical businesses.
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Nevertheless, gravity might prove to be the most powerful force in the next 12 months.
What's on the rise in fiscal quarter three 2022 earnings?
In the second half of calendar 2022, Twist Bioscience will encounter several headwinds.
First, a strong US dollar might derail business momentum. In fiscal 2021, 10x Genomics (TXG) - Get 10x Genomics Inc. Report generated 47% of revenue from international customers last year. It recently prepared investors for declining year-over-year revenue in Q2 2022 due in large part to a strong greenback.
Twist Bioscience makes 55% of its revenue from next-generation sequencing (NGS) devices. Genetic testing and liquid biopsy instruments must be able to interpret patient samples to accurate templates, according to nerds in lab coats. Unfortunately, customers such as Invitae (NVTA) - Get Invitae Corporation Reporthave significantly reduced their own growth plans in recent weeks.Regulatory delays and lack of commercial traction might push some orders from other customers into fiscal 2023 or later.
Third, stocks have unexpectedly escaped the worst of the biotech correction. Investors may be tempted to dismiss the notion, considering the growth stock is down 43% since the beginning of 2022, but shares of Twist Bioscience trade at a significant premium relative to the underlying business.
Wall Street appears to be staking the premium on sales growth, which has been fairly impressive. Fiscal 2022 revenue is expected to increase by about 47% compared to the year-ago period, while sales in fiscal 2023 are expected to increase by about 40%.
Twist Bioscience is far from profitability and will be a cash-hungry business for the next few years. According to my models, the DNA synthesis leader is expected to suffer a operating loss of $245 million, an all-time high. In fact, it would be nearly 60% higher than the all-time high set last year.
To be fair, the business ended March 2022 with $609 million in cash, but will surely need more in the next 24 to 36 months to maintain growth investments. The upcoming share dilution may not provide an attractive margin of safety near the present share price.
Hope for the Best, but Prepare for Less
Twist Bioscience is expected to be a premium growth stock for many years to come. However, investors must maintain valuation discipline, especially as financial conditions worsen. That suggests investors should be cautious heading into the fiscal quarter of 2022 earnings readout in August.