10x Genomics (TXG) is on the front end of a long term technology adoption curve. Its an expensive stock by any measure, but the opportunity in front of them looks significant as well. At a time when COVID-19 has disrupted the basic fabric of everyday life, we think the relative stability and predictability of their product story is a good place to be and one that can generate upside of 30-50% over the coming 6 to 12 months.
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Background
10x Genomics (TXG) is a Life Science and Tools company focused on the new field of single cell sequencing. Along with the rest of the economy, TXG was hurt by COVID19; research scientists shut down experiments, sales meetings were cancelled, and TXG withdrew guidance for the year. Estimates for 2020 have come in from a pre-pandemic high of $356M to the current level of $267M while 2021 estimates fell slightly from $473M to the current level of $457M. The stock has performed well regardless, rallying back toward its pre-pandemic high of $106 after touching a low of $51 at the end of March.
Thesis
TXG manufactures the standard tool in the novel research area of single cell RNA sequencing or scRNA-seq for short. In academic research being the standard tool scRNA-seq, means we can expect TXG to enjoy a multi year adoption cycle among academic and Pharmaceutical and Biotech research labs as they deploy the new technique in their research. While it helps, you don't have to be an expert in scRNA-seq, genomics, or any of the other technical terms that describe TXG reagents and tools. What you do need to understand, rather, is that a TXG long is a bet on the Grant Cycle, or a bet on understanding the reward system that motivates research scientists.
The Grant Cycle starts with researchers submitting grant applications for funding that supports their research and maintains their employment at their academic research institution. The NIH review process favors funding novel technologies that can advance the field of human health. Research scientists gravitate to new tools to increase the probability of securing a grant, which funds their research, which is then published, which is then referenced by other scientists, which enhances future funding, which pays for more experiments with novel tools like TXG's suite of products. This cycle can last for many years as it did for the Affymetrix GeneChip, the Illumina SNP Array, and Illumina's sequencing family of products, among others. We've identified trends in grant award at the individual investigator and institutional level that show TXG has a long way to run.
Valuation
TXG trades at a high multiple of sales against 2020 consensus revenue. Ranging from a pre-pandemic low of 20X to its current level of 30X, and and for 2021, the range has been 15X to 20X, although these ranges reflect the drop in estimates as well. Based on the rapid adoption of single-cell sequencing we can model 2021 sales at $525M versus consensus of $457M, and 2022 of $682M versus consensus of $598M. Given penetration is likely to remain low and in a rapid adoption phase through 2022, we expect these current lofty multiples are likely to remain and support a stock 20% to 40% higher over the next 6 to 12 months.
Catalysts
- Earnings | August 11, 2020
- NIH Exporter | Our grant tracker shows the adoption of single-cell sequencing within NIH funded projects. The data is updated weekly.
Risks
- Intellectual Property | Biorad and other lawsuits
- Competitive risks | There several companies with expertise in the various components of TXG's system
- Research Funding | Continued economic weakness could lead to cutbacks in NIH funding. In addition, there may be fallout from the negative consequences COVID-19 is having on the University system.
All data available upon request. Please reach out to with any inquiries.
