Please join us on Thursday, March 10th, at 12:30 PM ET for a presentation of our short thesis on TXG. If you have questions, email and we'll address them live.
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10X Genomics (TXG) | Best Idea Short | Great Technology with Growing Pains Thursday, March 10, 12:30 PM ET Health Care Clients: CLICK HERE for event details (includes video and materials link), Add to Outlook Calendar |
Background
TXG had been screening long in our MicroQuads process due to its estimate momentum for much of 2021 and early 2022, but each time we updated our NIH tracker, we saw weakening trends in the data. With the release of 4Q21 results and guidance, it's clear that our data was on the right track. While the stock has declined sharply from its peak, the multiple remains high at 12x EV/Sales. In Quad 4, growth stories that carry the high multiple promises of a large TAM don't do well, and we have very few stocks with double-digit EV/Sales multiples left on our screen. From here the tendency might be to conclude that their guidance and the coming slowdown is already in the stock price. Based on our tracker, that doesn't appear to be the case.
Thesis
TXG's guidance implies a significant deceleration in adoption, which we measure in NIH funding trends. We count new Primary Investigators and Funded Institutions with NIH grant money likely to be spent on single-cell sequencing equipment and consumables. While the count continues to increase, the rate of change will turn negative this year and will have an even bigger impact on 2023. We use the count of funded scientists to model consumables and system sales, and according to the most recent update, 2020 was the peak.
If you believe TXG's 2022 guidance of $600M - $630M, which is down from the pre-earnings consensus of $678M, 2023 revenue estimates are coming down further from here. The additional downside will follow the stock's drop from the pre-earnings estimate of $904M to post-event estimate of $832M. Rolling the trend forward, we see funding through 2023 and revenue looks more likely to be $759M. We understand the opportunity for single-cell sequencing, are big fans of the technology, and expect adoption to increase with a high long-term ceiling. The point is not to confuse that appreciation of the technology with a good stock, especially in Quad 4 which is unfavorable for high multiple growth stories. The market just went from paying 70x EV/Sales to 31x EV/Sales to just 12x forward EV/Sales for TXG. The logic is better that it gets cut in half again vs. doubling from here, in our opinion.
In MicroQuad terms, growth is now below average and decelerating, a condition we expect to persist through the remainder of 2022. In Quad 4, a stock with this setup performs poorly. In the aggregate, Health Care Equipment and Life Science & Tools backtest better in this environment, but the estimate momentum should dominate the share price. We'll review our outlook for spending on single-cell sequencing in terms of Research Institutions, Primary Research Scientists, and grant volume, all of which relate to the demand for equipment and consumables.
Key Slide
Our model is up-to-date and available for interested Health Care Subscribers, as well as all data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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