Is 23andMe (ME) a Great Long-Term Buy Candidate?

Founded in 2006, 23andMe Holding Co. (ME) is a healthcare company that provides direct-to-consumer genetic testing and ancestry services. The company operates across two segments: Consumer & Research Services and Therapeutics. 

23andMe Holding Co. became public on the Nasdaq through a SPAC deal with VG Acquisition Corp. that took place on June 17th. ME’s gross proceeds from the merger deal are equal to about $592 million, which is anticipated to accelerate the company’s consumer health and therapeutics businesses growth. In addition, the stock has been gaining momentum over the past month, demonstrating a 17% rally. 

In this article, I am going to analyze the company from a quantitative and qualitative standpoint to determine if ME presents a good buying opportunity for long-term investors. 

Recent News

On October 22nd, 23andMe Holding announced that it had signed a merger agreement with a web-based platform that delivers medical care and pharmacy services, known as Lemonaid Health, Inc. The purchase price stands at $400 million, and the company will pay 25% of the transaction in cash and 75% in its Class A Common Stock. Management plans to close the deal by the end of 2021. This development impressed investors, causing ME shares to close Friday’s trading session up 5.23% at $10.87. Undoubtedly, it’s a piece of good news as the acquisition allows 23andMe to expand its presence in the direct-to-consumer health services space and strengthen its consumer business with Lemonaid’s innovative telemedicine and prescription drug delivery services. As a result, the company should benefit in the long term. 

Financial Overview 

On August 13th, 23andMe reported earnings for its first quarter of fiscal 2022. The company currently collects revenue from Personal Genome Service (“PSG”) kit sales to clients as well as research activities. Its first-quarter revenue came in 23% higher year-over-year at $59.24 million. This increase was mainly attributable to higher PGS kit sales volume during the quarter. 

The company’s Adjusted EBITDA loss has been reported at 27 million compared to a loss of $20 million as of 1QFY21. However, ME expanded its consumer base to 11.6 million genotyped customers, which is up from 11.3 million as of 4QFY21. 

In addition, the company has a collaboration agreement with GlaxoSmithKline plc (GSK) for the development of its immuno-oncology candidate, known as CD96, which is in Phase 1 trials in patients with advanced solid tumors. The deal includes GSK’s $300 million equity investment and 50/50 costs and profits split. In addition, the company has access to GSK technology and platforms. ME discovered that CD96 plays an important role in regulating NK and T cell antitumor activity. In case of success, the company has a significant addressable market opportunity, with an estimated sales of $41 billion in 2021. 

The company’s liquidity position is strong, considering $769.9 million of cash on the balance. With a first-quarter cash burn rate of $44.53 million, I would expect the cash on hand to be sufficient for at least 12 months.

Analysts that cover ME forecast its second-quarter sales to be $55.71 million, while its full-year sales should stand at $256.12 million. The company expects FY22 revenues to be in the range between $250 and $260 million. 

Options Traders Betting On a Rise

The options market traders also have a bullish outlook on the company as they continue to make bullish bets. During the October 15th trading session, there was a purchase of about 6,900 $12.50 January 20th, 2023, call options for $1.80 per contract. As a result, this transaction brings the total number of open contracts to 7,729 (source: barchart.com). With a total dollar value of about $1.25 million, I would characterize this transaction as a moderate bullish trade. A buyer of those calls would need the stock to rise to $14.3 by the expiration date, a gain of about 32% from ME Friday’s closing price.

The Bottom Line

I believe that 23andMe Holding Co. is a great long-term buy candidate. The company continues to increase its revenues and consumer base. In addition, a strong cash balance should support its expansion plans. ME has also signed up a key partnership with well-known industry brands, positioning itself for long-term success. Their leading drug has demonstrated promising early outcomes, having a vast addressable market. Finally, options traders are betting on the stock’s appreciation. 

Analysts have rated ME as a “Moderate Buy”, with an average price target of $12.50.